Petitioner entered into a contract with respondent whereby, in
return for the exclusive right to make and sell a keyholder
designed by petitioner for which a patent application was pending,
respondent agreed to pay petitioner a royalty of 5% of the selling
price. If the patent was not allowed within five years, the royalty
was to be reduced to 2 1/2% of sales. The patent was not allowed
within five years, whereupon respondent accordingly reduced the
royalty to 2 1/2%. Subsequently, the patent application was
rejected. After respondent had paid petitioner royalties for a
number of years following rejection of the patent application, it
brought an action in District Court seeking a declaratory judgment
that the royalty agreement was unenforceable on the ground that
state law which otherwise made the contract enforceable was
preempted by federal patent law. The District Court upheld the
contract, but the Court of Appeals reversed, holding that the
contract became unenforceable once petitioner failed to obtain a
patent within the stipulated 5-year period, and that a continuing
obligation to pay royalties would be contrary to "the strong
federal policy in favor of the full and free use of ideas in the
public domain," Lear, Inc. v. Adkins, 395 U.
, 395 U. S.
Federal patent law does not preempt state
contract law so as to preclude enforcement of the contract. Cf.
Kewanee Oil Co. v. Bicron Corp., 416 U.
. Pp. 440 U. S.
(a) Enforcement of the contract is not inconsistent with the
purposes of the federal patent system (1) to foster and reward
invention; (2) to promote disclosure of inventions, stimulate
further innovation, and permit the public to practice the invention
once the patent expires; and (3) to assure that ideas in the public
domain remain there for the free use of the public. Pp.
440 U. S.
(b) Enforcement of the contract does not prevent anyone from
copying the keyholder, but merely requires respondent to pay the
consideration it promised in return for the use of a novel device
which enabled it to preempt the market. P. 440 U. S.
(c) When, as here, no patent has issued, and no ideas have been
withdrawn from public use, the case is not controlled by the
holding of Lear, supra,
that a patent licensee who
establishes the invalidity of a patent need not pay royalties
accrued after the issuance of the patent,
Page 440 U. S. 258
nor by the rationale of that case that it is desirable to
encourage licensees to challenge the validity of patents in order
to further the strong federal policy that only inventions meeting
the rigorous requirements of patentability shall be withdrawn from
the public domain. P. 440 U. S.
(d) Enforcement of the contract comports with the principle that
the monopoly granted under a patent cannot lawfully be used "to
negotiate with the leverage of that monopoly," Brulotte v. Thys
Co., 379 U. S. 29
379 U. S. 33
since the challenged reduced royalty, rather than being so
negotiated, rested on the contingency that no patent would issue
within five years. Pp. 440 U. S.
567 F.2d 757, reversed.
BURGER, C.J., delivered the opinion of the Court, in which
BRENNAN, STEWART, WHITE, MARSHALL, POWELL, REHNQUIST, and STEVENS,
JJ, joined. BLACKMUN, J., filed an opinion concurring in the
p. 440 U. S.
MR. CHIEF JUSTICE BURGER delivered the opinion of the Court.
We granted certiorari, 436 U.S. 943, to consider whether federal
patent law preempts state contract law so as to preclude
Page 440 U. S. 259
enforcement of a contract to pay royalties to a patent
applicant, on sales of articles embodying the putative invention,
for so long as the contracting party sells them, of a patent is not
In October, 1955, the petitioner, Mrs. Jane Aronson, filed an
application, Serial No. 542677, for a patent on a new form of
keyholder. Although ingenious, the design was so simple that it
readily could be copied unless it was protected by patent. In June,
1956, while the patent application was pending, Mrs. Aronson
negotiated a contract with the respondent, Quick Point Pencil Co.,
for the manufacture and sale of the keyholder.
The contract was embodied in two documents. In the first, letter
from Quick Point to Mrs. Aronson, Quick Point agreed to pay Mrs.
Aronson a royalty of 5% of the selling price in return for "the
exclusive right to make and sell keyholders of the type shown in
your application, Serial No. 542677." The letter further provided
that the parties would consult one another concerning the steps to
be taken "[i]n the event of any infringement."
The contract did not require Quick Point to manufacture the
keyholder. Mrs. Aronson received a $750 advance on royalties and
was entitled to rescind the exclusive license if Quick Point did
not sell a million keyholders by the end of 1957. Quick Point
retained the right to cancel the agreement whenever "the volume of
sales does not meet our expectations." The duration of the
agreement was not otherwise prescribed.
A contemporaneous document provided that, if Mrs. Aronson's
patent application was "not allowed within five (5) years, Quick
Point Pencil Co. [would] pay . . . two and one half percent (2
1/2%) of sales . . . so long as you [Quick Point] continue to sell
Page 440 U. S. 260
In June, 1961, when Mrs. Aronson had failed to obtain a patent
on the keyholder within the five years specified in the agreement,
Quick Point asserted its contractual right to reduce royalty
payments to 2 1/2% of sales. In September of that year, the Board
of Patent Appeals issued a final rejection of the application on
the ground that the keyholder was not patentable, and Mrs. Aronson
did not appeal. Quick Point continued to pay reduced royalties to
her for 14 years thereafter.
The market was more receptive to the keyholder's novelty and
utility than the Patent Office. By September, 1975 Quick Point had
made sales in excess of $7 million and paid Mrs. Aronson royalties
totaling $203,963.84; sales were continuing to rise. However, while
Quick Point was able to preempt the market in the earlier years and
was long the only manufacturer of the Aronson keyholder, copies
began to appear in the late 1960's. Quick Point's competitors, of
course, were not required to pay royalties for their use of the
design. Quick Point's share of the Aronson keyholder market has
declined during the past decade.
In November, 1975, Quick Point commenced an action in the United
States District Court for a declaratory judgment, pursuant to 28
U.S.C. § 2201, that the royalty agreement was unenforceable. Quick
Point asserted that state law which might otherwise make the
contract enforceable was preempted by federal patent law. This is
the only issue presented to us for decision.
Page 440 U. S. 261
Both parties moved for summary judgment on affidavits, exhibits,
and stipulations of fact. The District Court concluded that the
"language of the agreement is plain, clear and unequivocal, and has
no relation as to whether or not a patent is ever granted."
Accordingly, it held that the agreement was valid, and that Quick
Point was obliged to pay the agreed royalties pursuant to the
contract for so long as it manufactured the keyholder.
The Court of Appeals reversed, one judge dissenting. 567 F.2d
757. It held that, since the parties contracted with reference to a
pending patent application, Mrs. Aronson was estopped from denying
that patent law principles governed her contract with Quick Point.
Although acknowledging that this Court had never decided the
precise issue, the Court of Appeals held that our prior decisions
regarding patent licenses compelled the conclusion that Quick
Point's contract with Mrs. Aronson became unenforceable once she
failed to obtain a patent. The court held that a continuing
obligation to pay royalties would be contrary to "the strong
federal policy favoring the full and free use of ideas in the
public domain," Lear, Inc. v. Adkins, 395 U.
, 395 U. S. 674
(1969). The court also observed that, if Mrs. Aronson actually had
obtained a patent, Quick Point would have escaped its royalty
obligations either if the patent were held to be invalid, see
or upon its expiration after 17 years, see Brulotte
v. Thys Co., 379 U. S. 29
(1964). Accordingly, it concluded that a licensee should be
relieved of royalty obligations when the licensor's efforts to
obtain a contemplated patent prove unsuccessful.
On this record it is clear that the parties contracted with full
awareness of both the pendency of a patent application and the
possibility that a patent might not issue. The clause de-escalating
the royalty by half in the event no patent issued within five years
makes that crystal clear. Quick Point apparently placed a
significant value on exploiting the basic novelty
Page 440 U. S. 262
of the device, even if no patent issued; its success
demonstrates that this judgment was well founded. Assuming,
that the initial letter and the commitment to
pay a 5% royalty was subject to federal patent law, the provision
relating to the 2 1/2% royalty was explicitly independent of
federal law. The cases and principles relied on by the Court of
Appeals and Quick Point do not bear on a contract that does not
rely on a patent, particularly where, as here, the contracting
parties agreed expressly as to alternative obligations if no patent
Commercial agreements traditionally are the domain of state law.
State law is not displaced merely because the contract relates to
intellectual property which may or may not be patentable; the
states are free to regulate the use of such intellectual property
in any manner not inconsistent with federal law. Kewanee Oil
Co. v. Bicron Corp., 416 U. S. 470
416 U. S. 479
(1974); see Goldstein v. California, 412 U.
(1973). In this as in other fields, the question
of whether federal law preempts state law
"involves a consideration of whether that law 'stands as an
obstacle to the accomplishment and execution of the full purposes
and objectives of Congress.' Hines v. Davidowitz,
312 U. S.
, 312 U. S. 67
Kewanee Oil Co., supra,
at 416 U. S. 479
If it does not, state law governs.
In Kewanee Oil Co., supra
at 416 U. S.
-481, we reviewed the purposes of the federal patent
system. First, patent law seeks to foster and reward invention;
second, it promotes disclosure of inventions to stimulate further
innovation and to permit the public to practice the invention once
the patent expires; third, the stringent requirements for patent
protection seek to assure that ideas in the public domain remain
there for the free use of the public.
Enforcement of Quick Point's agreement with Mrs. Aronson is not
inconsistent with any of these aims. Permitting inventors to make
enforceable agreements licensing the use of their inventions in
return for royalties provides an additional incentive to invention.
Similarly, encouraging Mrs. Aronson
Page 440 U. S. 263
to make arrangements for the manufacture of her keyholder
furthers the federal policy of disclosure of inventions; these
simple devices display the novel idea which they embody wherever
they are seen.
Quick Point argues that enforcement of such contracts conflicts
with the federal policy against withdrawing ideas from the public
domain and discourages recourse to the federal patent system by
allowing states to extend "perpetual protection to articles too
lacking in novelty to merit any patent at all under federal
constitutional standards," Sears, Roebuck & Co. v. Stiffel
Co., 376 U. S. 225
376 U. S. 232
We find no merit in this contention. Enforcement of the
agreement does not withdraw any idea from the public domain. The
design for the keyholder was not in the public domain before Quick
Point obtained its license to manufacture it. See Kewanee Oil
at 416 U. S. 484
In negotiating the agreement, Mrs. Aronson disclosed the design in
confidence. Had Quick Point tried to exploit the design in breach
of that confidence, it would have risked legal liability. It is
equally clear that the design entered the public domain as a result
of the manufacture and sale of the keyholders under the
Requiring Quick Point to bear the burden of royalties for the
use of the design is no more inconsistent with federal patent law
than any of the other costs involved in being the first to
introduce a new product to the market, such as outlays for research
and development, and marketing and promotional expenses. For
reasons which Quick Point's experience with the Aronson keyholder
demonstrate, innovative entrepreneurs have usually found such costs
to be well worth paying.
Finally, enforcement of this agreement does not discourage
anyone from seeking a patent. Mrs. Aronson attempted to obtain a
patent for over five years. It is quite true that, had she
succeeded, she would have received a 5% royalty only on
Page 440 U. S. 264
keyholders sold during the 17-year life of the patent.
Offsetting the limited terms of royalty payments, she would have
received twice as much per dollar of Quick Point's sales, and both
she and Quick Point could have licensed any others who produced the
same keyholder. Which course would have produced the greater yield
to the contracting parties is a matter of speculation; the parties
resolved the uncertainties by their bargain.
No decision of this Court relating to patents justifies
relieving Quick Point of its contract obligations. We have held
that a state may not forbid the copying of an idea in the public
domain which does not meet the requirements for federal patent
protection. Compco Corp. v. Day-Brite Lighting, Inc.,
376 U. S. 234
(1964); Sears, Roebuck Co. v. Stiffel Co., supra.
Enforcement of Quick Point's agreement, however, does not prevent
anyone from copying the keyholder. It merely requires Quick Point
to pay the consideration which it promised in return for the use of
a novel device which enabled it to preempt the market.
In Lear, Inc. v. Adkins, 395 U.
(1969), we held that a person licensed to use a
patent may challenge the validity of the patent, and that a
licensee who establishes that the patent is invalid need not pay
the royalties accrued under the licensing agreement subsequent to
the issuance of the patent. Both holdings relied on the
desirability of encouraging licensees to challenge the validity of
patents, to further the strong federal policy that only inventions
which meet the rigorous requirements of patentability shall be
withdrawn from the public domain. Id.
at 395 U. S.
-671, 395 U. S.
-674. Accordingly, neither the holding nor the
rationale of Lear controls when no patent has issued, and no ideas
have been withdrawn from public use.
Enforcement of the royalty agreement here is also consistent
with the principles treated in Brulotte v. Thys Co.,
379 U. S. 29
(1964). There, we held that the obligation to pay
Page 440 U. S. 265
royalties in return for the use of a patented device may not
extend beyond the life of the patent. The principle underlying that
holding was simply that the monopoly granted under a patent cannot
lawfully be used to "negotiate with the leverage of that monopoly."
The Court emphasized that to "use that leverage to project those
royalty payments beyond the life of the patent is analogous to an
effort to enlarge the monopoly of the patent. . . ." Id.
at 379 U. S. 33
Here, the reduced royalty which is challenged, far from being
negotiated "with the leverage" of a patent, rested on the
contingency that no patent would issue within five years.
No doubt a pending patent application gives the applicant some
additional bargaining power for purposes of negotiating a royalty
agreement. The pending application allows the inventor to hold out
the hope of an exclusive right to exploit the idea, as well as the
threat that the other party will be prevented from using the idea
for 17 years. However, the amount of leverage arising from a patent
application depends on how likely the parties consider it to be
that a valid patent will issue. Here, where no patent ever issued,
the record is entirely clear that the parties assigned a
substantial likelihood to that contingency, since they specifically
provided for a reduced royalty in the event no patent issued within
This case does not require us to draw the line between what
constitutes abuse of a pending application and what does not. It is
clear that whatever role the pending application played in the
negotiation of the 5% royalty, it played no part in the contract to
pay the 2 1/2% royalty indefinitely.
Our holding in Kewanee Oil Co.
puts to rest the
contention that federal law preempts and renders unenforceable the
contract made by these parties. There we held that state law
forbidding the misappropriation of trade secrets was not preempted
by federal patent law. We observed:
"Certainly the patent policy of encouraging invention is not
disturbed by the existence of another form of
Page 440 U. S. 266
incentive to invention. In this respect, the two systems [patent
and trade secret law] are not and never would be in conflict."
416 U.S. at 416 U. S.
Enforcement of this royalty agreement is even less offensive to
federal patent policies than state law protecting trade secrets.
The most commonly accepted definition of trade secrets is
restricted to confidential information which is not disclosed in
the normal process of exploitation. See
Torts § 757, Comment b,
p. 5 (1939). Accordingly, the
exploitation of trade secrets under state law may not satisfy the
federal policy in favor of disclosure, whereas disclosure is
inescapable in exploiting a device like the Aronson keyholder.
Enforcement of these contractual obligations, freely undertaken
in arm's-length negotiation and with no fixed reliance on a patent
or a probable patent grant, will
"encourage invention in areas where patent law does not reach,
and will prompt the independent innovator to proceed with the
discovery and exploitation of his invention. Competition is
fostered, and the public is not deprived of the use of valuable, if
not quite patentable, invention."
(Footnote omitted.) 416 U.S. at 416 U. S.
The device which is the subject of this contract ceased to have
any secrecy as soon as it was first marketed, yet, when the
contract was negotiated, the inventiveness and novelty were
sufficiently apparent to induce an experienced novelty manufacturer
to agree to pay for the opportunity to be first in the market.
Federal patent law is not a barrier to such a contract.
* In April, 1961, while Mrs. Aronson's patent application was
pending, her husband sought a patent on a different keyholder and
made plans to license another company to manufacture it. Quick
Point's attorney wrote to the couple that the proposed new license
would violate the 1956 agreement. He observed that
"your license agreement is in respect of the disclosure of said
Jane [Aronson's] application (not merely in respect of its claims),
and that even if no patent is ever granted on the Jane [Aronson]
application, Quick Point Pencil Company is obligated to pay
royalties in respect of any keyholder manufactured by it in
accordance with any disclosure of said application.
MR. JUSTICE BLACKMUN, concurring in the result.
For me, the hard question is whether this case can meaningfully
be distinguished from Brulotte v. Thys Co., 379 U. S.
(1964). There, the Court held that a patent licensor
could not use the leverage of its patent to obtain a royalty
Page 440 U. S. 267
that extended beyond the patent's 17-year term. Here, Mrs.
Aronson has used the leverage of her patent application to
negotiate a royalty contract which continues to be binding even
though the patent application was long ago denied.
The Court, ante
at 440 U. S. 265
asserts that her leverage played "no part" with respect to the
contingent agreement to pay a reduced royalty if no patent issued
within five years. Yet it may well be that Quick Point agreed to
that contingency in order to obtain its other rights that depended
on the success of the patent application. The parties did not
apportion consideration in the neat fashion the Court adopts.
In my view, the holding in Brulotte
toward extension of a patent monopoly whose term is fixed by
statute, 35 U.S.C. § 154. Such hostility has no place here. A
patent application which is later denied temporarily discourages
unlicensed imitators. Its benefits and hazards are of a different
magnitude from those of a granted patent that prohibits all
competition for 17 years. Nothing justifies estopping a patent
application licensor from entering into a contract whose term does
not end if the application fails. The Court points out,
at 440 U. S. 263
that enforcement of this contract does not conflict with the
objectives of the patent laws. The United States, as amicus
maintains that patent application licensing of this
sort is desirable because it encourages patent applications,
promotes early disclosure, and allows parties to structure their
On this basis, I concur in the Court's holding that federal
patent law does not preempt the enforcement of Mrs. Aronson's
contract with Quick Point.