Aronson v. Quick Point Pencil Company – Oral Argument – December 06, 1978

Media for Aronson v. Quick Point Pencil Company

Audio Transcription for Opinion Announcement – February 28, 1979 in Aronson v. Quick Point Pencil Company

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Warren E. Burger:

We will hear arguments first this morning in Aronson against Quick Point Pencil Company.

Mr. Cook, I think you may proceed whenever you are ready.

C. Lee Cook, Jr.:

Mr. Chief Justice and may it please the Court.

The petitioner in this case, Jane Aronson, in 1955 made an invention.

That invention was the design of a particular kind of key ring or key holder.

Now, the particular design of that key holder is not really material to this case, but I think I should note that it is different from the design shown in the English patent which is attached to the brief of the amicus Ercon and it is different from the design shown in the (Inaudible) patent which is a part of the record in this case.

Potter Stewart:

Is there a picture of it or a representation of it anywhere in the —

C. Lee Cook, Jr.:

There is not as such in the printed record.

What attached to the record which came to the Court we believe is an actual sample of that key ring.

Warren E. Burger:

How is that relevant to the contract issue?

C. Lee Cook, Jr.:

It is not Your Honor except that the only reason I mentioned the particular — that it is different from the design shown in those patents is the argument of the amicus Ercon, that it was in the public domain or known before the invention by the petitioner.

The closest thing that describes it is the catalog of the respondent Quick Point, which is in the printed record, but you cannot see the inside of the key ring.

Warren E. Burger:

Alright.

C. Lee Cook, Jr.:

Having made this invention and having prepared and filed a patent application which disclosed and described the invention, she took it to a number of potential manufacturers.

One of those manufacturers was the respondent Quick Point Pencil Company in St. Louis.

The then President of Quick Point was very interested in manufacturing this article and he proposed a license agreement which called for a 5% royalty on the sales of the article by Quick Point.

At the request of petitioner, an addendum was prepared to this license agreement.

That addendum provided that if no patent were issued within a five years, the royalty rate would be reduced to 2.5%, but that royalty would continue as long as Quick Point made the article.

Now no patent was ever obtained and at the end of the five-year period, the royalty was reduced to 2.5%.

Quick Point paid those royalties for many years after it was known that no patent was obtained and after repeatedly reaffirmed its obligation to do so.

Now although the article was secret at the time it was first disclosed to Quick Point and it was disclosed at Quick Point and the others under an obligation of confidence, it is the nature of the invention is such that once it was put on commercial sale, it was revealed to the public and could be copied by others.

And indeed by the late 1960’s, a number of other companies were making devices substantially identical to Quick Point’s.

Now in 1975, Quick Point stopped paying royalties and brought this suit for declaratory judgment.

It contended in the suit that the agreement was illegal and unenforceable.

It did not contend as respondent’s brief in this Court contends that the intention of the parties was that no royalties would be due if no patent were obtained.

On the contrary, it contended the opposite that is that the agreement bound Quick Point to pay royalties even if no patent were obtained and that made the agreement illegal.

On a stipulated record and cross motions for summary judgment, the district court found that the agreement was clear and unambiguous, that it was valid and enforceable under the state law and that there was no reason in the federal patent policy or the federal antitrust policy for the federal courts to interfere with its enforcement.

The Eighth Circuit Court of Appeals in a two-to-one decision, reversed.

It held that the principles involved in the federal patent law precluded Quick Point from being bound by its agreement, because no patent was issued and the article had become publicly known.

It was no longer a secret.

C. Lee Cook, Jr.:

District Judge Larson sitting by designation decided saying that in his view, the matter should be controlled by state contract law and that there was no reason for the federal courts to preempt and refuse to enforce the state law.

Thus the question presented by this case is does the federal patent law preempt the state law and prevent enforcement of a contract calling for continuing royalties on a previously secret article simply because no patent was issued and the article is no longer a secret.

Now we submit that the decision of the Court of Appeals here constitutes an unnecessary interference by the federal courts with the normal application of state contract law.

That interference was not required by nor even consistent with the federal patent law.

I intend to deal primarily with the error of the Court of Appeals with respect to the federal patent law.

We believe also that there is nothing inconsistent about enforcing this agreement with the federal antitrust laws or the policy of free and open competition.

That subject matter is however covered very thoroughly in the briefs, particularly the brief of the United States amicus and I believe that Mr. Grossman who will speak on behalf of the United States will also touch on that issue.

Specifically I want to deal with three points.

First, that this case is governed by the rule laid down by this Court in Kewanee Oil versus Bicron.

Secondly; that the Court of Appeals failed to apply that test, and thirdly, if that test is applied to the state contract law involved in this case, it is clear that the objectives of the federal patent law are not interfered with and that there is no conflict between the federal patent law and the state contract law in this case.

Potter Stewart:

That really just one point, isn’t it that this case is governed by Kewanee?

C. Lee Cook, Jr.:

Yes, it really is and I don’t think that there can be any doubt that it is governed by Kewanee.

The Court will recall in that case, that it sustained the validity of state trade secret law, which permitted an owner of a trade secret to sue former employees for misappropriating those trade secrets.

In that case, the Court reaffirmed its prior holding that the patent law is not exclusive and that the state law should be enforced unless it conflicts with the patent law or the federal law, and the way to determine whether a state law conflicts with a federal law, the Court said, was to look at whether it stands as an obstacle to the accomplishment of the objectives of the federal law.

Now the objective of the federal patent law as set forth in the Constitution is to promote the progress of science and the useful arts; in other words, to encourage invention.

The patent law encourages invention in two ways.

First, it offers the inventor a patent, which for a limited period of time permits that inventor to exclude others from making, using or selling his invention.

Secondly, in return for that extraordinary grant, it requires the inventor to disclose fully his invention to the public in the patent.

And that way, not only is the public free to use it after the expiration of the patent, but it becomes a part of the body of knowledge and that itself should contribute to and stimulate further inventions or other advances in the art.

Warren E. Burger:

In your view Mr. Cook, would the case be any different?

If no patent had been applied for, but the idea that might have been presented to the respondent company and then they made the agreement for either a 2.5% straight or whatever.

C. Lee Cook, Jr.:

In my view Mr. Chief Justice, the case would be no different, because in this case, the petitioner took nothing from the public.

She never got a patent and whether it was revealed in a patent or contained in a patent application is really irrelevant.

The point is she revealed an idea, she made a contract and there is no reason for this respondent to get out of its obligation to pay the royalties under that contract.

The test thus therefore under Kewanee is whether enforcing this agreement will discourage invention or prevent the disclosure of inventions to the public.

The Court of Appeals nowhere applied this test.

It did not even consider it as far as we can tell from the opinion.

There is no discussion of the analysis or the test in Kewanee at all.

Although it made reference to Kewanee, it did not discuss its test.

When that test is applied here however, it is clear that enforcing this agreement will not create an obstacle to the accomplishment of the objectives of the patent law, but will instead further those objectives.

C. Lee Cook, Jr.:

It will certainly not discourage invention.

On the other hand, it will encourage invention to enforce agreement such as this because inventors if they know that they can enter into agreement such as this will be willing to expand the time effort and money without concern as to whether their invention is patentable or not or without concern as to whether their invention is one which can be kept secret.

And as this Court noted in Kewanee, often an important invention may not be patentable, but it is nevertheless an important invention.

Under the law prior to the decision in the Court of Appeals, if the inventor made a valuable invention and the manufacturer was willing to pay for it, the inventor could have the expectation of entering into an enforceable agreement which would provide him a reward for his invention and he would therefore be encouraged to invent.

Failure to enforce this agreement on the other hand will discourage invention, because the inventor who cannot obtain a patent will be faced with two alternatives.

He can go into the manufacture of the article himself which this Court noted in Kewanee may not be the best allocation of our economic resources or he can attempt to sell it for a single lump sum payment before it becomes a big secret, get all of his money immediately.

But that is often difficult too, because licensees are reluctant to make substantial payments until they know what the commercial success of the invention would be.

Not only will enforcement of this agreement encourage invention, it will cause those inventions to be made available and known to the public sooner rather than later.

Rather than waiting to see if he can obtain a patent under agreements of this type, the inventor puts his article or his invention out to the public immediately; not only into the commercial channels where it may benefit the economy but also to the public so that they can copy it or be stimulated to make further and additional inventions.

Warren E. Burger:

But on some inventions, the copying of it is not easy, because the content is discernible.

Is it not true that some companies even having a patentable item do not patent it but simply seek to preempt the market –

C. Lee Cook, Jr.:

That is true Your Honor.

Warren E. Burger:

— without any patent so that they don’t have to disclose?

C. Lee Cook, Jr.:

And that is really the truly anomalous thing about the Court of Appeals’ decision and the position of the respondent in this case, because if this invention had been one which could be kept secret and was not revealed upon its sale to the public, the Court of Appeals and the respondent would say the agreement is enforceable, and yet the objectives of the patent law are furthered much better by an agreement where the invention becomes public and available to the public than they are in a situation where the invention by its nature remain secret.

Yet in this Court, in Kewanee specifically approved, not only enforcing implied agreements against employees, but contracts for inventions where the subject matter of the invention remained secret.

Now really nowhere in respondent’s brief, does respondent ever contend that enforcement of this agreement will discourage invention or discourage the disclosure of invention.

And that is because it is impossible to make that contention on these facts.

Under Kewanee, if the enforcement of the state law will not interfere with the accomplishment of the patent law objectives of encouraging invention and encouraging disclosure to the public of inventions which is the case here, there is no need; there is no reason for the federal courts to interfere with the normal application of state law.

Now instead of dealing with this point, the respondent argues that the difficulty here is that enforcing agreements of this type will cause inventors who apply for a patent to abandon those patent applications.

The argument goes that an inventor will apply for a patent, get an agreement such as this, and then abandon the application.

That argument we believe is unsound for several reasons.

First, it is factually unsound.

As this Court noted in Kewanee, the benefits of a patent are such that it is very unlikely that anyone who really has a patentable invention will abandon that patent application.

Secondly, it is particularly true where as in this case, the commercial use of the invention discloses it to the public.

We are not talking about the famous coca cola formula which Mr. Justice Marshall referred to in his concurring opinion in Kewanee.

We are talking about an invention that when it is sold, it is publicly known.

Under those circumstances, the chance is that a patent applicant will in bad faith in order to take advantage of his licensee, somehow abandon a patent application on a valid patentable invention are remote indeed.

Moreover, this problem if indeed it is a problem, is one which easily can be solved by draftsmanship.

The contract can say the patentee or the licenser will diligently pursue the application.

And then if he does not do so, he has breached the agreement, or it can say that the licensee may have the right to prosecute the patent application; a provision that is quite common and frequent in patent license agreement, or it can provide that if no patent is obtained, the royalties will cease or they will cease after a given number of years or they will cease after the production of a given number of units or the payment of a given amount of royalty.

C. Lee Cook, Jr.:

All of those are ways of overcoming this problem if indeed it is a problem.

But let us assume for the moment, for purposes of argument, that there would be some incentive by a patent applicant who has a license agreement such as this to abandon the application.

That does not mean that enforcing this agreement will stand as an obstacle to the accomplishment of the patent laws.

As this Court pointed out in Kewanee, some diversion from the patent system is permissible and the diversion in the patent from the patent system or the potential diversion from the patent system in Kewanee is much greater than the potential diversion here, because in Kewanee, it contemplated an invention which remained secret.

There at least the owner of the invention has an option.

He can say, I will get the patent, but if I get that, it becomes public or I can keep it secret and try to protect my rights by keeping it secret.

Here the inventor has no such choice because once he puts his article on sale, it becomes public and he cannot keep it secret.

The diversion from the patent system, if indeed there is any, is much less in this case than in the facts presented in Kewanee.

As I mentioned before in answer to Mr. Chief Justice’s question, the fact is that both the Court of Appeals and respondent here would have enforced this agreement if the subject matter of the agreement had not been the article which became public upon its sale, but for example the process by which it is made.

Even though a patent application had been applied for and abandoned under the rationale of the decision below, that agreement would be enforceable.

Yet merely because the invention here was one which became public upon its sale, the Court of Appeal says, it is not enforceable.

Yet I submit to you that the circumstances here are less inconsistent and indeed more, they are in fact consistent with the objectives of the patent law, much more so than in the case where the invention can be kept secret.

Finally this argument of respondent we believe deals not with the objectives of the patent law, but with the means by which the patent chooses to accomplish those objectives.

The important thing here is not whether somebody gets a patent, the important thing is that they make inventions and that they disclose those inventions to the public.

The fact that the state law will encourage invention and encourage the disclosure does not make it inconsistent with the federal patent law.

Indeed as this Court noted in Kewanee, certainly the patent policy of encouraging invention is not disturbed by the existence of another form of incentive to invent.

The state contract law involved in this case and the federal patent law are not in conflict; they are in harmony.

Both can stand together; one complimenting the other to encourage research and innovation which is vital to our economy and to the continued growth of our nation, probably more so today than in any time in our history.

The decision of the Court of Appeals thwarts that encouragement of invention, and unnecessarily strikes down the state law; it should be reversed.

Your Honor, I would like to reserve the rest of my time for rebuttal.

Warren E. Burger:

You very well, Mr. Cook.

Mr. Grossman?

B. Barry Grossman:

Mr. Chief Justice, may it please the Court.

The issue before you today is whether state laws, which enforce contracts of the type here at issue, which so significantly impede federal pattern or competition policy as to require preemption.

Preemption issues of this type have been resolved by the Court by defining the specific federal pattern and competition policies articulated by Congress and carefully analyzing the impact on such policies that would result from enforcement under state law of various types of contract or procedural rights.

Applying such analysis to this case, United States has concluded that enforcement of the contracts such as that entered into between Mrs. Aronson and Quick Point would not adversely impact any federal policy.

On the contrary, we believe that the availability of such contractual means of rewarding inventors will foster the achievement of innovation, rapid disclosure of new ideas, and new entry into commercial markets, goes at the very heart of federal pattern and competition policy.

Since petitioner’s counsel has devoted most of his remarks to pattern policy, I should like to start my remarks with a discussion of the impact of this contract on federal competition policy.

Contracts of the type which concern us today pose no danger to federal competition policy that cannot be checked by the normal application of the antitrust laws.

Statements by respondent to the effect that enforcement of the contract will promote monopoly in contrast to free competition portray a misunderstanding of both of those consents.

William H. Rehnquist:

Mr. Grossman, are you suggesting that there are contracts which would be enforceable under state law, which do not violate the antitrust laws, but which would nevertheless be preempted by what you referred to as federal competition policy?

B. Barry Grossman:

No, I do not make that suggestion.

I mean, it is conceivable that contracts enforceable under state law could violate federal antitrust policy.

For example, a requirements contract, which under the antitrust standard, would foreclose an unreasonable portion of the market.

They could be enforceable under state law, but violative of the antitrust law.

One could ever contract that would not be violative of antitrust laws, but would nevertheless frustrate federal patent policy, but I am not suggesting that there is some level of impact on competition beneath the dignity as it were of an antitrust violation that would nevertheless require preemption, unless it frustrated some other federal policy.

William H. Rehnquist:

What are other federal policies such as –?

B. Barry Grossman:

The patent policy for this case.

William H. Rehnquist:

Which would be the laws —

B. Barry Grossman:

In terms of – The patent policy and antitrust policy are complementary here, It is conceivable, of course that one could have a situation in which federal patent policy would be frustrated even though antitrust policy might not be.

William H. Rehnquist:

And one looks to find federal patent policy, I take it in the laws enacted by Congress pursuant to the patents?

B. Barry Grossman:

That’s right.

Basically the primary goals of patent policy as articulated by this Court have been the promotion of innovation, the facilitation of rapid disclosure of new ideas and the preservations of ideas in the public domain and protection of those ideas from monopoly confirmed.

William H. Rehnquist:

I presume the source of this Court’s knowledge on that subject must be the acts of Congress?

B. Barry Grossman:

I can think of no other source.

William H. Rehnquist:

There cannot–

B. Barry Grossman:

It is not clear to me what monopoly could be referred to here.

Certainly the enforcement of the contract here at issue does not confer any monopoly in the sense of a right to exclusive views as that term is used in the patent laws.

Warren E. Burger:

But isn’t the contrary precisely what the opposing parties relying on?

B. Barry Grossman:

The fact that they are being faced with what they believe to be unfair competition is precisely the opposite or the —

Warren E. Burger:

Because that is anomalable, because he had no monopoly, if she had not monopoly to sell?

B. Barry Grossman:

That’s right Your Honor.

Nor does this case involve monopoly power in the sense that it is used under the antitrust laws, namely the power to control price or forestall entries.

The degree of market power conferred on a licensee, a commercially valuable idea, will depend on a number of factors, including the degree to which the product is differentiated in different or competing products, the degree to which the idea can be easily ascertained and used by competitors, and the extent to which competitors have offsetting advantages relative to the licensee.

Now we don’t suggest that indeterminate licenses of commercially usual ideas could never contravene federal antitrust policy.

What we do suggest is that the likelihood is not so great as to warn what is the equivalent to an antitrust rule of per se illegality implemented in the form of patent preemption of state contract law.

Our policy of free competition does not mandate competition free of any and all contractual restrains.

Only those restrains, which are deemed unreasonable, are prohibited.

Economic analysis did not indicate that licenses of the type here at issue inherently restrain competition.

Moreover, we lack experience or evidence, which would indicate that such contracts will unreasonably restrain trade in such a wide variety of cases as to justify a per se rule.

B. Barry Grossman:

As this Court noted last term in Exxon v. State of Maryland, the fact that one could reasonably high hypothesize situations in which competition might be impeded does not justify preemption.

The existence of the antitrust law should provide sufficient protection against any significant competitive restrains arising from contracts of this type.

Unfortunately, the Court of Appeals’ decision could produce results inimical to the goals of antitrust policy to the extent that it decreases the available incentives for innovative effort.

It adversely impacts on the dynamic core of our free enterprise system to the extent that it increases risks to both inventors and licensees.

It is likely to channel inventions to the larger firms, who are better able to spread and absorb those risks.

Such a trend of course would foster greater industrial concentration contrary to national competition policy.

I would like to address just one point on the patent policy and its relation to contracts of this type.

I believe the critical core of respondent’s argument is stated on page 28 of its brief, which says that the risk is that inventors such as Aronson, who believe their inventions to be patentable will have every incentive to license their inventions during the period the application is pending and then abandon their application in order to obtain royalties for a period longer than allowed by the patent laws.

We suggest that this argument is inconsistent with this Court’s decision in Kewanee, unsound as a matter of economic analysis, and unsupported by empirical evidence.

It appears unsound is a matter of economic analysis, not only as to the specifics of this case, but in the general run of cases as well.

Here, Mrs. Aronson’s failure to obtain the patent hardly redounded to her economic benefit.

There are three components, which determine how much money an inventor such as Mrs. Aronson would make in a situation like this.

One is the royalty rate, which she will receive and the second is the unit price of the goods sold, and the third is the number of units sold.

Reduction at anyone of these three numbers or components will reduce her total compensation.

Here, we know from the record that the failure to obtain a patent reduced two of those components, and economic theory would indicate that the third was also reduced.

Here, her royalty rate was cut in half and also the total sales on which that royalty rate was based would be decreased.

Instead of obtaining a percentage on all sales, embodying her idea as would been the case, had the patent been issued, she only receive moneys on those sales made by Quick Point whose share of the overall market declined as new entrants begin making key holders reflecting her ideas.

Additionally, economic theory teaches that a monopolist is capable of charging a higher price for its goods and could be obtained for them in a competitive market.

As to the extent the disclosure of her trade secret open the market to competition, the selling price of Quick Point’s key chains on which the inventor’s royalty was based may have been reduced.

The same economic analysis would lead one to believe that most inventors are likely to prefer the 17-year monopoly returns afforded by a patent system to the less certain rewards that could be obtained under a contract law, even if those awards might be spread out beyond the termination of a patent.

This certainly was the conclusion of this Court in Kewanee and we are unaware of any empirical information or body of academic literature developed since Kewanee, which challenges the reasonableness or correctness of that conclusion.

Potter Stewart:

How about the Brulotte case?

Does that bear on this?

B. Barry Grossman:

I suggest not Your Honor.

The Brulotte case turned upon the concept that the 17-year period is the absolute limit, which Congress grants in exchange for the monopoly power, which it has granted.

Brulotte strikes to me to be based upon the same reasoning as was displayed in earlier cases by this Court; Kellogg v. National Biscuit Company and Scott v. Marcalus, which state that upon the quid pro quo received by the public in return for the grant of a monopoly is that at the end of that 17-year period, everybody will be free to use the discovery, free of any restrictions to the inventor.

Here of course there was no patent monopoly granted and thus the basic rationale of Brulotte does not bear —

Potter Stewart:

Since everybody could use it from the word go?

B. Barry Grossman:

That’s correct.

Potter Stewart:

What was the item involved in Brulotte, I have forgotten?

Potter Stewart:

Was it something that was necessarily disclosed to the public?

B. Barry Grossman:

That was not clear from the record.

It was a hop picking machine, but there is nothing in the Court’s decision at least which would reveal whether – reveal to me whether it would have been disclosed to the public upon sale.

Potter Stewart:

Broadly read the Brulotte case, I should suppose does bear on this, doesn’t it?

I mean says that, even though it has been disclosed to the public, both because it was patented and presumably because it was sold publicly, you can’t receive any license payments for a non-patented article.

B. Barry Grossman:

Your Honor I believe —

Potter Stewart:

Without violating because the patent preempts it?

B. Barry Grossman:

Yeah, I believe that Brulotte stands for the proposition that where one has obtained a patent then one may not obtain any additional compensation related to that patent after the —

Potter Stewart:

After the 17 years.

B. Barry Grossman:

— the determination of the 17 years.

I think that is the limit.

That is the issue the Court was faced in Brulotte and I think that is the limit, a logical limit of its holding.

William H. Rehnquist:

Certainly —

Thurgood Marshall:

There is one case that’s Kewanee.

B. Barry Grossman:

Excuse me Your Honor.

Thurgood Marshall:

Your side only has one case, that’s Kewanee.

That is all I have heard beside policy this morning.

Am I right?

B. Barry Grossman:

I believe it would be more accurate to say that not only does Kewanee support it and not only does the reasoning of Kewanee support it, but the very basic preemption theory which this Court used to support it, namely that absent a frustration of federal policy, there is no reason to preempt state law.

The other cases in this general field, Sears, Compco, Kewanee etcetera found that enforcement of the particular state policies or rules at issue there would result in the frustration of federal purpose prohibited by the Constitution.

Lewis F. Powell, Jr.:

May I ask you this —

Warren E. Burger:

Mr. Grossman, your time is up.

B. Barry Grossman:

Thank you.

Warren E. Burger:

Mr. Griswold.

Erwin N. Griswold:

May it please the Court.

At pages 20 and 21 of the record appears the joint stipulation in this case to which were attached a number of these devices as exhibits.

And I have asked the clerk to make them available to the Court.

I would point out that exhibits W, X, Y and Z are key holders made by the respondent.

The other exhibits are key holders made by competitors.

It doesn’t make any difference which ones are used, but I identify them that way and to anticipate a question, I think that seeing the key holders is relevant.

Warren E. Burger:

I had assumed Mr. Griswold that the case proceeded on the assumption that all the others were the same or could be the same because there was no monopoly?

Erwin N. Griswold:

Yes, Yes indeed Mr. Chief Justice.

That’s why I say it doesn’t make any difference which of the — I would ask the clerk to make them available to the Court if the Court is willing.

It is relevant because it is apparent when you see it that there is no secret here.

I have one of them here and you that is it and you put your keys on, and then you with a little force press it back.

Once it has been made and distributed, it is completely apparent to anyone not merely a skilled mechanic but to anyone what the idea is.

Warren E. Burger:

But you suggest that by way of argument that it was never patentable in the first place?

Erwin N. Griswold:

No, Mr. Chief Justice that I don’t know.

Two similar devices were patented.

I suggest that first on the ground that it shows that the Kewanee decision is not applicable to this case.

This case does not involve a trade secret as that term was used in Kewanee.

I think it is also relevant because there are arguments here that these indefinite royalties are justified because of the head start that Quick Point got when the secret was disclosed to it.

And that head start, was worth a great deal, which could be compensated for by royalties indefinitely in the future.

I think the exhibits themselves show that the head start here though probably something was not much, neither in terms of capital cost, nor in terms of time.

Now at the outset, I think it is very important to recall that this case involves a relatively narrow issue.

There are amicus briefs, which discuss extensively problems of technology and knowhow licensing in billions of dollars which is effected.

But this case does not involve any aspect of technology or knowhow licensing.

Any decision on that question should of course await a record and briefs which deal with it.

And some of the briefs and the government’s briefs in particular talk extensively of trade secrets.

Indeed the government’s brief uses the phrase traded secrets of more than 40 times.

But this is not a trade secret case in the sense in which that term is customarily used and what — as it was involved before the Court in the Kewanee case.

Indeed in the Court’s opinion in the Kewanee case, the Court said on page 484, by definition a trade secret has not been placed in the public domain, but this key holder has been placed in the public domain.

It has been public since 1956, 22 years ago.

It’s there for everyone to see and to copy.

There is no secret way of doing business.

No secret formula or process in continues use.

No device which is used in the course of business, but not disclosed.

Here the item was fully disclosed as soon as the key holder was put on the market as the contract contemplated it would be.

The distinction seems to be to some to be more subtle than I should think it would be.

I think I can illustrate it by the fact that I was counsel for the petitioner in the Kewanee case and one of the first things I did was to come to the Court and meet with the clerk and make arrangements for the impoundment of the record so that the secrets which were included in it would not be disclosed.

Erwin N. Griswold:

There has been no necessity for impounding the record in this case.

There was no secret here.

No need for reverse engineering which is talked about in the patent cases.

Since 1956, the secret has been in the public domain.

William H. Rehnquist:

Well, Mr. Griswold does the authority of the state to enforce its own contract laws depend on the presence or absence of a trade secret?

Erwin N. Griswold:

No Mr. Justice, but it does depend on the presence or absence of relation to the patent laws and I will turn to that right now.

The most important element in this case is that it is the case involving a patent application and I think that that is as already been pointed out, but I would like to turn to page 23 of the record which is the initial letter, which was the item on page 25 embodies the contract.

The second paragraph of the letter of June 26, 1956, “Quick Point Pencil Company will have the exclusive right to make and sell key holders of the type shown in your application, Serial No. 542677 and will start manufacturing within 60 days.”

And then at the end of the following paragraph there is a further reference to the design shown in your application Serial No. 542677 and then turn to page 24, the second full paragraph, “in the event of any infringement” and there could not be an infringement unless there was a patent.

But this was not something used by the President of the respondent company alone for Mrs. Aronson came back with an amendment to the contract which was accepted and that appears on page 25 and that starts out in the event that the key holder patent application number 542677 is not allowed within five years, Quick Point Pencil Company agrees to pay Jane Leopoldi as she then was two-and-one-half percent of sales at selling prices as long as you continue to sell same.

Warren E. Burger:

Mr. Griswold, I wonder would it be irrational in your view to treat this transaction between the two parties as being made up of two contracts, one contract if the 5%, if the patent issued another contract to pay two-and-half percent if they didn’t get a patent within five years.

Erwin N. Griswold:

Well, I don’t think so Mr. Chief Justice.

They have as obviously negotiated at the same time as part of one deal and I point out —

Warren E. Burger:

Different days, literally are they not?

Erwin N. Griswold:

One day apart and finally accepted on June 27th by both parties seems to me that it is one contract and it is not as the government says several times in its brief a contract to pay 5% if a patent is granted and two-and-half percent if a patent is not granted.

It is a contract to pay 5% but if a contract is not granted within five years then they pay two-and-half percent, that is the event which actually happened.

The patent application was abandoned some six years after the contract was made, but the royalties have been paid at the rate of two-and-half percent after five years until 1975 when this suit for a declaratory judgment —

William H. Rehnquist:

But the terms of the contract did require payment of two-and-half percent of the royalties regardless of whether or not a patent is issued?

Erwin N. Griswold:

Yes it did and that is nothing which was introduced.

That was also the same and the original letter of June 26, “on all key holders which we make in accordance with the design shown in your application”, no limited time was specified there and the question in this case is simply whether that provision can stand in the light of the patent laws.

I am glad that at the close of the argument one of the relevant cases Brulotte against Thys was mentioned.

There are several cases which are relevant by a way of background here, Sears, and Compco to begin with which hold in rather sweeping terms that there cannot be any exclusive right with respect to an unpatented article.

Brulotte and Thys which holds that even if it is patented a contract otherwise perfectly valid under state law to continue to pay royalties is invalid because of conflict with the patent laws if it calls for royalty payments after the patent period has expired.

And then I would refer particularly to Lear against Adkins which in many ways is quite close to this case.

It involved a patent license granted during the application period.

The decision of the Court was thereafter a patent was granted and the licensee decided that the patent was invalid and gave notice that it would not pay the royalties covered by the contract and counterclaimed in a suit brought to recover the royalties that the patent was invalid and the basic decision in that case was that the licensee could attack the validity of the patent.

But the Court has also held that he need not pay royalties from the time when he claimed that the patent was invalid.

That of course was in the teeth of the provision of the contract and our position here is that the petitioner here should not be in a better position than she would be if she’d got a patent in which case her right to royalties would have terminated after 17 years or better position then if she’d got a patent and had attacked this validity in which case her obligation to pay royalties would cease if she got a decision that it was invalid.

Warren E. Burger:

Do we really know whether she is in a better position?

What about the exclusive right to get royalties from licensees from the whole market?

Warren E. Burger:

Obviously great many people copied this idea and had it been patentable, all of these others or many of them might have had to pay a royalty, the license fee?

Erwin N. Griswold:

I don’t think —

Warren E. Burger:

And it would have maintained — her payments would have remained at 5% throughout the 17 years.

Erwin N. Griswold:

If she’d got the patent within 5 years which she did not and under the contract she was entitled to only two-and-half percent even if she got the patent.

Warren E. Burger:

But by the same token doesn’t this what we were just discussing indicate that the parties contracted with the view to the possibility if not the likelihood that there would be no patent obtained?

Erwin N. Griswold:

I don’t think that is by any means clear, this is not a contract —

Warren E. Burger:

What was the reduction of two-and-half percent for?

Erwin N. Griswold:

It was not and if you don’t get a patent, it was if you don’t get a patent within five years and this might have continued for patent application she might have taken that to the Court of Customs and Patent Appeals or to the US District Court, might have been an appeal that could have gone on for a long time and the contract was not if you don’t get a patent, but if you don’t get it within five years.

But I don’t think that’s really relevant for the reason I’m about to state because another distinction which must be made here is that this is not a simple contract case entirely in the realm of state law a likely agreement in the one in Lambert case where no patent or patent application was involved.

Potter Stewart:

That’s what I was going to ask you Mr. Griswold, in order to be sure that I understand the scope in entire thrust of your argument.

What if in this case there been no reference whatsoever to any patent application nor to whether or not a patent would be [Inaudible] but simply the fact show the disclosure by present Mrs. Aronson, to Quick Point of this keyring and a simple agreement that we’ll pay you two-and-half percent of the sales price for this keyring for every keyring we sell from now on with no reference to any patent law and that this had been written down in a contract that was valid under state law.

Erwin N. Griswold:

I know of no reason why that would not be valid.

That is the Warner-Lambert case.

This Court has never spoken to an endless contract.

There are some emanations in the common law to the effect that such things must be limited to a reasonable time.

Potter Stewart:

No it’s endless only insofar as it’s not in perpetuity, it’s every time I sell these keyrings they pay Mrs. Aronson two-and-half percent.

Erwin N. Griswold:

But that was true in Brulotte against Thys, if they stop picking half, they wouldn’t have to pay royalties.

Potter Stewart:

I know but my question you think that sort of a contract would not at all be preempted by federal patent law?

Erwin N. Griswold:

That held that — the key element in this case is that there was a patent application.

Potter Stewart:

And that’s critical?

Erwin N. Griswold:

And that’s the central fact of this case.

The contract was made specifically with respect to it.

It provided for an exclusive license which could apply to the secret, but obviously applied to the patent and the petitioner had no power to grant an exclusive license unless she got a patent, anybody else could make it, her license couldn’t be exclusive.

Potter Stewart:

Well according to how you define the word exclusive, one could easily read that as meaning I won’t license to anybody else?

Erwin N. Griswold:

Yes, but that it was the patent application license is a basic significance because this contract was not made under state law alone.

It exercised a power specifically given to the petitioner by the patent laws and I call attention to Title 35 of the United States’ Code, Section 261 to which not sufficient weight I believe is given in our brief as I prepared for the argument I wish we would had a point more specifically on this, but that Section provides that applications for patent or any interest there in shall be assignable in law by an instrument in writing and that’s what we have here.

The applicant, patentee or his assigns or legal representative may in like manner grant and convey an exclusive right under his application for patent or patents to the whole or any specified power of the United States and here the patent applicant was exercising that power granted to her under the patent laws.

She was proceeding under the patent laws.

Now there are many other provisions to which I could make reference.

I find for example that the word applicant or application appears at least 240 times in the basic provisions of the patent law.

John Paul Stevens:

Mr. Griswold, could I ask you one question about your basic theory of the case?

Your opponent say that your argument rests entirely insofar as you claim a conflict with the patent law, is entirely on the fact that enforcement of this agreement will provide a motivation to a patent applicant to abandon that patent application.

It’s that the policy involved here is one that causing people to abandon patent applications and that you do not rely on the interference with the policy to motivate disclosure of inventions or to encourage invention itself, but just rely on their first point about abandoning patent application.

Is that a fair characterization of the central thrust of your idea?

Erwin N. Griswold:

No Mr. Justice —

John Paul Stevens:

What is the central thrust of your argument then?

Erwin N. Griswold:

The central point here is that the petitioner operated under the patent law.

She got definite advantages from the patent law, in that she got leverage in making her contract.

No one would have made this contract for these royalties on a simple disclosure which could immediately be made by anybody else.

That’s one reason I wanted the exhibits distributed the show how simple it was and how easy it would be for anyone else to make it.

The reason she got substantial royalties which have aggregated up to 1975 more than $200,000.

John Paul Stevens:

But granting all this, what Federal policy will be frustrated by enforcing this contract?

Erwin N. Griswold:

In the first place it is not disclosure, disclosure is colorless.

John Paul Stevens:

I don’t know what color it is?

Erwin N. Griswold:

Disclosure is colorless.

John Paul Stevens:

Not disclosure, is it invention, the policy favoring invention?

Erwin N. Griswold:

It is the capitalizing on the use of the patent law thereby obtaining leverage which produces a larger royalty than what otherwise be used — available and which in this case provided for a royalty which I will call indefinite because it has no limit in time.

John Paul Stevens:

I respectfully suggest you are not identifying a federal policy that would be frustrated by enforcement of this contract?

Erwin N. Griswold:

The federal policy is using the patent laws to obtain a monopoly position that is to have the leverage to obtain larger royalties than what otherwise be available, royalties which must eventually be paid by the public in the charges for the article and which continue indefinitely under this contract, despite the fact that if she had obtained the patent they would have been limited to 17 years.

Warren E. Burger:

Suppose Mr. Griswold that when she came to this company no patent application was pending and they made exactly the same contract that was made, but that she never applied for a patent and assume no obligation to apply was in the contract.

How will that be any different?

Erwin N. Griswold:

While I suggest Mr. Chief Justice —

Warren E. Burger:

How would she then be exploiting or making any use of the patent law?

Erwin N. Griswold:

I suggest Mr. Chief Justice you said and she made exactly the same contract, she would never have made the same contract without having produced a patent application.

No body would agree to pay substantial royalties for this idea open to the public in the public domain or simply for its disclosure.

The only thing that you would have to go by then would be head start value and again this is one reason why I asked that the item be distributed because here it’s applying that the head start value is very little.

There is no great capital investment.

Almost any mechanic could put the machine together to make this item.

William H. Rehnquist:

But your client in the contract took the risk of the non-patentability, didn’t he?

Erwin N. Griswold:

Well I think that’s the issue in the case to some extent.

William H. Rehnquist:

Perhaps federal law as you say precludes the enforcement of such a contract but certainly the contract by its terms would seem to indicate that?

Erwin N. Griswold:

Well, the contract by its terms does not deal with the question of its proper construction in the event that no patent is ever obtained.

I have tried to deal with that in the last point of my brief where I refer to the fact that the contract is with respect to a patent application and it calls for the exclusive license to make and sell and when the exclusive license collapsed because there was no power, the petitioner did not deliver her part of the contract when she didn’t get any power to deliver an exclusive rescind.

I suggest that there was a failure of consideration and that the contract should be construed to mean that royalties would not be payable for more than a reasonable time.

I don’t think it is entirely clear that this contract made between layman should be construed as a matter of contract law requiring indefinite continuing payment of royalties over an definite period.

Now it’s true that the patent application gave no rights to the applicant.

There can be no infringement of a patent application.

Nevertheless a patent application has a substantial in terrorem effect.

When a competitor sees patent pending on an item he is disinclined to make the item despite the fact that he knows that it is not protected until the patent is obtained.

He doesn’t want to incur the capital costs with starting production of the item, setting up his sales force, printing catalogs and so on, when he knows that he may soon be foreclosed by the granting of a patent.

The licensing of an application and the use of the patent pending designation are part of the benefits expressly recognized by the patent law.

I have already referred to Section 291 — 261, but Section 292 is the provision which makes it a crime to use patent pending on an article unless indeed you are the applicant or the licensee of a patent application in which case you can use it and that undoubtedly provides important leverage in determining — in the bargaining process which determines the amount of the royalties under the contract.

The heart of this case I suggest is found in the fact that there was a patent application and that the contract was made with respect to that application.

The petitioner used the patent laws and the application had value because of its potentiality under the patent laws.

No one would pay a substantial amount for a non-exclusive license to make this article.

As the affidavit of the petitioner appearing on page 55 of the record shows the key holder was disclosed to several commercial enterprises while negotiations with the respondent were pending.

If Quick Point had not come to an agreement with the petitioner for an exclusive license, the petitioner could have sought to make an agreement with one or the other commercial enterprises.

If an exclusive license had been granted to a competing company, Quick Point would have been frozen out if a patent was granted and for practical purposes could not have made the article while the patent application was pending.

On the other hand Quick Point knew that if the petitioner obtained the patent on the device, the exclusive license would assure the Quick Point had the right to manufacture the key holder free from competition for the patent period.

Quick Point, in this case, bargained not only for disclosure, but also for the future exclusive right to use the invention once a patent was obtained.

In short, the patent application which was an integral part of the process established by the government under the patent laws pursuant to the Patent Clause of the Constitution gave the petitioner bargaining leverage which she could not have had if she had not first filed a patent application.

The mere fact of the patent application gave the petitioner, gave the respondent considerable likelihood of protection against competitors while the patent application was pending and in this way the patent law was used as leverage where the petitioner’s benefit, but the patent laws gave more.

They gave hope that a patent would be obtained and in that event the contract gave Quick Point the exclusive right to make and sell the item.

This was a prospect made possible by the patent laws and it was fully utilized by the petitioner here.

The petitioner entered into the patent process and she obtained a substantial benefit because she invoked the patent laws.

Without the patent applications she would have been in a no position at all to obtain substantial royalties for this time, which was — for this item, which was incapable of exploitation without full disclosure.

She used the patent laws successfully even though she did not obtain a patent and her contract should be qualified by law in accordance with the principles which had been developed in several patent cases.

It is important again to recall that we are not dealing here with a continuing trade secret as in Kewanee.

There was a secret here, but it was inherently time limited.

Once the article was made and marketed, the secret was fully disclosed.

Erwin N. Griswold:

And thus as far as the objective of disclosure under the patent system is concerned a decision in favor of Quick Point will have no adverse effect.

The holder of an idea for a secret device like this can keep it to himself if he wishes to do so, but if he wants to realize it on it he must disclose it, there is no alternative.

He can of course apply for a patent without licensing the device in which case there will be no disclosure until a patent is issued and he will have no return from the idea while the patent is pending.

On the other hand he can license the idea with or without applying for a patent.

If he licenses the idea without applying for a patent, he can only hope to obtain head start value from the licensee.

And I suggest in this case that would be very small since the idea will be fully disclosed as soon as the licensee puts the item on the market.

The only way that the inventor can hope to get more is to apply for a patent, thus utilizing the patent laws and then seek to license the patent application in the hope for a patent.

That is what was done here.

The petitioner chose to proceed under the patent system and she got great leverage from the patent system.

Who would have paid very much for this idea on a non-exclusive basis which would have been the situation if no patent had been applied for.

Now turning again to Kewanee, I point out that it did not involve a license situation.

There was no question about the validity of a license or about the validity of a license extending for an indefinite period.

What it involved was a classic trade secret, breach of employment contract situation in which the Court was asked to strike down a longstanding body of State trade secret law which served important public policy objectives.

This the Court was understandably reluctant to do.

William H. Rehnquist:

The important public policy objectives of the states?

Erwin N. Griswold:

Important public policies objectives of the State yes Mr. Justice involving the sanctity of fiduciary relations between employers and employees within the State.

William H. Rehnquist:

Well, can we assume that if the state of Missouri or whatever state this contract was drawn and chose to enforce this contract.

They’ve — it viewed it as serving important public policy?

Erwin N. Griswold:

I think Mr. Justice, this Court would have to decide and my suggestion would be that whatever the public policy conceptions objectives may be, they are not nearly as important.

The sole issue here is whether it is valid to make a contract with respect to a pending patent application which calls for indefinite royalties extending beyond the period when royalties would be payable if a patent was allowed.

William H. Rehnquist:

Well, isn’t the sole issue also whether federal patent law preempts state law enforcing this contract?

Erwin N. Griswold:

Yes Mr. Justice to that extent and that step has long since been taken perhaps the clearest and most striking case being Brulotte against Thys where the Court held at no matter what the state contract law was, a contract calling for the payment of royalties after a patent had expired was invalid.

And I am contending here that a contract calling for the payment of royalties without limit of time made with respect to a specific pending patent application should likewise not be construed to call for the payment of royalties for an indefinite period because that would be contrary to the scope, effect, objective of the patent laws and I think here is perhaps a better answer to Mr. Justice Stevens’ question.

There is here the same interference with the patent law that there was in Brulotte against Thys.

Here, there is a disclosure, there is an obtaining of royalties with respect to the disclosure.

There is if this contract is invalid a perpetual handicapping of this competitor in the market with inevitable increase in the overall price that the public must pay for the item and as in Brulotte and Thys the contract was held to be invalid after the patent period expired.

I don’t know just when the contract becomes invalid here.

I think that a very good peace can be made for the proposition that royalties will not do under this contract after the patent application was abandoned.

We don’t have to deal with that.

There is no question in this case with respect to the payment of royalties during the patent application period.

Erwin N. Griswold:

There isn’t much question with respect to payment for a number of years, there isn’t any question with respect to the payment of royalties for 14 years after the patent application was abandoned because those royalties were paid and this suit is not an effort to get them back.

This suit is a suit for a declaratory judgment seeking a declaration that under proper application of the scope of the patent laws any provision in state law which calls for the payment of royalties for an indefinite period under a contract made specifically with respect to a patent application is invalid.

John Paul Stevens:

Mr. Griswold, I suppose one could describe the federal policy at stake in Brulotte as a policy against allowing a patent monopoly to have any rewards in addition to the monopoly itself, can be enlarged to that monopoly beyond the terms of patent grant, that you can obtain royalties on unpatented articles sold with the patent or on a period after the monopoly protection is expired.

I don’t see how that federal policy is implicated by this case when there is no monopoly in the first place?

Erwin N. Griswold:

I think Mr. Justice, the answer is that here there was a preliminary or in court patent monopoly.

There was the hope and expectation that a patent monopoly would be obtained and there was a contract made with respect to that hope and expectation which provided for larger royalties undoubtedly then would have been available if no patent application had been filed.

And so the patent laws have been used to obtain a larger tribute from the public to use it in that sense than would have been obtained if the patent laws had not been invoked and that I suggest is essentially the consideration which was behind this Court’s decision in —

Byron R. White:

But the party, the parties also contracted with respect to a payment absolute patent.

They said if no patent is obtained the royalties will go down?

Erwin N. Griswold:

Yes and —

Byron R. White:

Why and would the case be different if they had said in “and this is our valuation of the startup value of this disclosure?”

Erwin N. Griswold:

This is essentially the ground of Mr. Justice Harlan’s dissent in the Thys case, not startup value but lump sum payment for the machine and I can imagine a contract calling for royalty payments after the 17-year period.

For example suppose the contract provided that the royalties shall be so much for 17 years, but only half of them shall be paid in each year and the second half shall be paid in the 17 years following the expiration of the patent I would assume that would be —

Byron R. White:

But how can you say that they are using that the patent monopoly or the in-court patent monopoly is lending some leverage here when they expressly contract for what the royalties should be if there is no patent?

Erwin N. Griswold:

Well Mr. Justice if she got a patent she couldn’t get royalties for more than 17 years, no matter what the contract said.

Byron R. White:

Yes.

Erwin N. Griswold:

If she had been a – – if Quick Point had been a patent licensee and a patent had been obtained, Quick Point could attack the validity of the patent and from the time it attacked the validity of the patent it would not have to pay royalties no matter what the contract said.

Warren E. Burger:

But in that case over the 20 years or more the royalties would have been far in excess of $203,000 on this market rate.

Erwin N. Griswold:

In the Lear case?

Warren E. Burger:

No this case.

She would have had as I suggested —

Erwin N. Griswold:

I don’t know whether they would or not, that’s hard to — after all the contract that was made in 1956 was one which called for an aggregate of $200,000 royalty.

Warren E. Burger:

But it isn’t so difficult, you just take the period after the 5 years and double the royalties and add that to the 203 and then add if you could calculate it, so all the people who copied the idea would have to pay license fees.

Erwin N. Griswold:

I don’t see how that is applicable here, but particularly with respect to the Lear case where it was held that if the licensee attacks the patent and is successful, no loyalties are due from the time when he states that he will attack the patent and we find it difficult to think that the licensor of a patent application should stand in a better position than a person who has a good enough invention so that he gets a patent or even one like Lear who has a good enough invention so that he gets a patent but it is latter held to be invalid.

There is one point to which I would like to make reference.

Twice while this was going on Quick Point asserted its, through one means or another, its obligation to pay royalties.

That of course did not necessarily mean indefinitely but to continue to pay royalties.

I would point out that one of those letter was by its patent counsel and it may well have been simply erroneous.

It was written before the decisions of this Court in Sears and Compco, and Brulotte and Thys and the Lear case and this Court has been a great teacher in this area over the past 15 years.

And finally Quick Point may well have thought it equitable or generous to continue making such payments because for sometime it was the only one marketing the key holder.

William H. Rehnquist:

Mr. Griswold, do you consider Kewanee and Goldstein teaching cases as well as Brulotte and Compco?

Erwin N. Griswold:

Oh yes Mr. Justice of course and Kewanee is an excellent case that I am very much pleased with.

William H. Rehnquist:

I should think you would be. [Laughter]

Erwin N. Griswold:

But it has no relation to this case because this case did does not involve a trade secret of the sort which caused the concern of the Court in the Kewanee case and the Kewanee case did not involve a licensing situation.

Harry A. Blackmun:

Mr. Griswold, the record contains on page 39 a letter written in 1961 from counsel for Quick Point to Ms Leopoldi.

Stating flatly that even if no patent is ever granted, Quick point is obligated to pay royalties in respect of any key holders manufactured by it in accordance with any disclosure of said application.

Do you have any comment about that latter?

Erwin N. Griswold:

Well, Mr. Justice that’s what I thought I was commenting on that in the first place he may well have been wrong.

He was not an Officer of the company.

He was a patent counsel.

In the second place it was written before Sears and Compco and Thys and Lear as to which the Court I suggest has been a great teacher.

The things have developed, he may well have thought that was the law when he did it, but I suggest that the decisions of this Court had shown that is no longer the law and finally Quick Point may simply have wanted to be generous.

They had had good relations with this lady and until the 1960s, they did not have any competition as a practical matter.

It was only when beginning in the late 1960s, they found themselves at a heavy competitive disadvantage.

You may say only 2.5% royalty but that maybe half the profit.

It was only then that they began to explore the situation and come to the conclusion that the decisions of this Court pointed clearly in the direction that a license made with respect to a patent application should not give greater rights than would have been obtained if a patent had actually been granted.

Warren E. Burger:

Do you have anything further counselor?

C. Lee Cook, Jr.:

Yes just briefly, may it please the Court.

I would like to deal specifically with this letter, which referred to by Dean Griswold just at the end of his argument.

Because that letter I think also not only deals with the question of what was the intention of the party but answers also the argument about the fact that the policy really that’s its involved here in terms of whether some federal policy is afforded by the existence of the patent application.

That — the argument of respondent on that point ignores I believe the fact that the parties did specifically contemplate that no patent would issue and that in that event the royalty would be reduced to 2.5%.

He also argues that why would anyone sign such agreement or why would anyone enter into the agreement such as this, if he could not get exclusivity.

This letter, which is on page 39 of the record, I believe clearly demonstrates that the parties contemplated that they might not get exclusivity.

Indeed it says that we remind you that under the license agreement, — the agreement is in respect of the disclosure and not the claims.

It is the claims, which give the exclusivity and he is saying here that even if we get a patent, we may not have exclusivity with respect to what we are obligated to pay your royalties on.

Potter Stewart:

Mr. Cook what if a patent had issued?

First of all, there would have been a continuing obligation to pay 5%, not 2.5%.

C. Lee Cook, Jr.:

Yes.

Potter Stewart:

But then 17 years had expired after the issuance of the patent, what the obligation have continued?

C. Lee Cook, Jr.:

In my opinion, it would not under this Court’s decision in Brulotte because under those circumstances.

Potter Stewart:

It’s pretty clear, isn’t it under Brulotte?

C. Lee Cook, Jr.:

Yes, because those circumstances the patent owner has taken something from the public.

It has taken that extraordinary grant of the right to exclude the entire public from making, using, or selling this device.

And in Brulotte if the Court would recall, the Court’s – the opinion specifically said that the rationale here does not apply to contracts involving unpatented machines.

The rationale of Brulotte was as Mr. Justice Stevens pointed out if you give an inventor a monopoly by a patent, you cannot permit him to expand that monopoly whether to non-patented articles or beyond the 17 years.

But in this case, Aronson has taken nothing from the public.

The existence of the patent application gives her nothing against the public.

It gives her no right to exclude others and there is no public policy that wasn’t — certainly not the policy that was involved in Brulotte has no application here.

Warren E. Burger:

Well, Mr. Griswold has suggested that there is at least a late wind in her sales by virtue of being able to put the statement patent pending normally?

C. Lee Cook, Jr.:

Well, we not — the record doesn’t show for sure that anybody did put patent pending or anything in this case.

Potter Stewart:

They could have?

C. Lee Cook, Jr.:

But they could have, there is no doubt about that.

But also they could have you see the argument I believe the respondent really deserts the Court of Appeals because what the Court of Appeal said is that the important thing here is that that invention wasn’t secret.

It was somehow in the public domain, but if we had had a patent application on an invention, which was secret, and then abandon the patent application, the Court of Appeals would have enforced that agreement and yet the very same in terrorem effect, if you want to call it that, would be present and indeed in Kewanee there was no question — the decision was not that you can enforce the trade secret if you haven’t applied for a patent on it.

The decision was that you can enforce your rights in the trade secret.

Now that leaves –

Byron R. White:

Why you are supposed that royalty rate was higher in this contract up until than it was after the patent was denied?

C. Lee Cook, Jr.:

I think it is clear that the parties hoped there would be a patent.

And if there was a patent – –

Byron R. White:

They were paying for the right to use a mechanism that on which a patent application was filed?

C. Lee Cook, Jr.:

Exactly and I believe Your Honor that if the parties hoped there would be a patent and if there would had been a patent, Quick Point would have been willing to pay 5% royalty.

Byron R. White:

Do you think the case would be different to see if there had been no provision for a reduction in the royalty?

C. Lee Cook, Jr.:

Yes, I do.

I do because I think the reduction in the royalty in this case shows that the party specifically contemplated that the possibilities [Voice Overlap]

Byron R. White:

So if there hadn’t been a provision for reduction of the royalty in the event that there was no patent then you would agree they were piggybacking on the patent?

C. Lee Cook, Jr.:

No, I would not agree to that, Your Honor.

Byron R. White:

You just say it would be a different case?

C. Lee Cook, Jr.:

Yes, I will.

Byron R. White:

And what would be the result?

C. Lee Cook, Jr.:

You see that would depend upon the intention of the party.

C. Lee Cook, Jr.:

And I think the intention of the parties has made very clear here.

Warren E. Burger:

But the chief reason why the party — why they have a reduction in the patent — patent royalty from 5% to 2.5% because two arm’s-length parties agreed on that.

C. Lee Cook, Jr.:

Exactly and if —

Warren E. Burger:

And it doesn’t really make much difference or does it, why they agreed on it?

C. Lee Cook, Jr.:

Well, I don’t think it does but I think in this particular case the fact is they agreed on it because they contemplated that a patent might not issue and Quick Point was willing to pay the 2.5% for what Dean Griswold has referred to as the head start value.

Now we do know that their head start value was very substantial here.

They didn’t get competitors in this business until the late 1960s, even though the patent application was long out of existence.

The fact of the matter is that if there is a head start value, there is no federal interest in having the Court’s interfere with deciding what that value is?

If the parties in an arm’s-length negotiations agreed that value was 2.5%, why should the courts interfere with that?

Why shouldn’t the courts permit the state law to enforce that agreement?

Now, if I could touch just briefly on the question of a trade secret.

There is no doubt that when this invention was first disclosed to Quick Point, it was a trade secret.

That’s — it was — the fact that it was secret is conceded in respondent’s brief, it was stipulated to in this record.

The fact that it was a value is conceded in respondent’s brief because they can see that we are entitled to substantial payments for that disclosure.

The fact that it later became public by reason of the sale, does not mean that when the contract was entered into it was a secret.

But even if it were not a trade secret within the technical definition on trade secrets, it wouldn’t make any difference because the principle involved here should apply whether it’s an abstract idea, the concept for a television program, an advertising theme or anything that may not be a trade secret or a patentable invention.

The issue involved here is what is the federal policy which is supported by permitting the states to enforce bargains entered into between parties by which one agrees to share with the other the profits he may make from the other’s invention or idea and that’s exactly what we have here.

And if the court’s interfere with the enforcement of agreements like this, we will be taking away from potential inventors, particularly small inventors, the strong incentive to make inventions.

Otherwise they will be forced to either get a patent or they can’t get a patent, they will have to try to sell it for a lump sum, which is a Hobson’s choice.

We respectfully urge you to reverse the decision of the Court of Appeals.

Warren E. Burger:

Thank you gentlemen.

The case is submitted.