Facts: Plaintiff filed patent application in 1955 on a new type of key holder.  It was an ingenious design, yet so simple it could be easily copied absent a patent.  The contract said a 5% royalty would be paid by defendant for the exclusive right to make and sell.  If not patented within five years, then royalty is to be reduced to 2-1/2%.  After five years defendant began to pay 2-1/2%.  A few months later, after final rejection of the patent application, defendant continued to pay 2-1/2% for 14 years.  By 1975 there were $7 million sales and were still going strong: copies began to appear in the late 1960's.  The defendant sued for a declaratory judgment to declare that the royalty agreement was unenforceable based on state contract law being preempted by federal patent law.  The trial court held for plaintiff.  The circuit court of appeals held for defendant.

Issue:  Is this agreement binding or preempted by federal law?

Holding: It is binding.

Reason:   Defendant obviously placed significant value on exploitation of the idea.  The five percent royalty may have been subject to federal patent law, but the 2-1/2% was not.  Commercial agreements are the province of state law; just because agreement relates to intellectual property which may be patentable does not matter.  Patent law has three aims: (1) to foster and reward invention, (2) to promote disclosure, and (3) to assure that ideas in the public domain remain there.  Enforcement of the agreement will not discourage people from applying for patents.

Enforcement of the agreement does not prevent anyone from copying the key holder.  Lear stood for the desirability of encouraging licensees to challenge patents to further the strong federal policy that only inventions which meet rigorous patent requirements are withdrawn from the public domain. Brulotte says the monopoly granted under a patent cannot be used to negotiate with the leverage of that monopoly.  A patent application does give some leverage, but not much.

The pending appeal played no part in 2-1/2% royalty part.  Kewanee says that the exploitation of trade secret under state law may not satisfy the public federal policy of disclosure, but disclosure is inescapable in plaintiff's key holder.  There was no secrecy once it was marketed.  Federal patent law is not a barrier to such contract.

Blackmun concurring Nothing justifies stopping a patent application licensor from entering into a contract whose term does not end if the application fails.