Aronson v. Quick Point Pencil Co. - 440 U.S. 257, 99 S. Ct. 1096 (1979)

Rule:

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. In this as in other fields, the question of whether federal law pre-empts 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. If it does not, state law governs.

Facts:

After designing a keyholder and applying for a patent to protect its design, the designer, Jane Aronson negotiated a contract with Quick Point Pencil Co. (“company”) for the manufacture and sale of the keyholder. In one part of the contract the company agreed to pay royalties to the designer based on sales of the designer's putative invention in return for the company's having the "exclusive right to make and sell keyholders of the type shown in the designer’s patent application,” and in another part of the contract, embodied in a separate document, the parties agreed that if the patent application were not allowed within five years, the company would pay a reduced royalty on sales of the designer's keyholder "so long as the company would continue to sell the same. When the designer failed to obtain a patent on the keyholder within the five years specified in the agreement, the company, which had begun manufacture and sale of the designer's keyholder, asserted its contractual right to reduce royalty payments. Shortly thereafter, the designer's application for a patent was finally rejected on the ground that the keyholder was not patentable. The company continued to pay reduced royalties to the designer for 14 years after denial of the patent application, but ultimately, after competitors began the manufacture and sale of similar keyholders, brought an action in the United States District Court for the Eastern District of Missouri, asserting that the royalty agreement was unenforceable because state law, which might otherwise make the contract enforceable, was preempted by federal patent law. The District Court held that the agreement had no relation to whether or not a patent were granted and ruled that the company was obliged to pay royalties under the contract so long as it manufactured the keyholder. The United States Court of Appeals for the Eighth Circuit reversed on appeal, holding that the contract between the designer and the company became unenforceable once the designer failed to obtain a patent, and that imposing a continuing obligation on the company to pay royalties would be contrary to the federal policy favoring the full and free use of ideas in the public domain.

Issue:

Under the circumstances, was the company obligated to pay reduced royalty to the designer, as stipulated in the parties’ contract, notwithstanding the fact that the designer failed to obtain patent for the keyholder?

Answer:

Yes.

Conclusion:

The Court reversed the decision of the Court of Appeals, holding that the state contract law was not preempted by federal patent law so as to preclude enforcement of the agreement even though a patent had not been obtained, since enforcement of the agreement, which had been freely undertaken in arm's length negotiation with no fixed reliance on a patent or a probable patent grant, was not inconsistent with the aims of the federal patent system. The Court held that the enforcement of the agreement did not prevent anyone from copying the keyholder, but merely required the company to pay the consideration which it promised in return for the use of a novel device which had enabled the company to be the first on the market with the device.