Kimble v. Marvel – Supreme Court quiets criticism of per se rule against post-patent royalties

Supreme Court Justice Kagan

Justice Kagan delivered the opinion of the Court in Kimble v. Marvel.

The U.S. Supreme Court’s recent decision in Kimble v. Marvel Entertainment, LLC (2015) rejuvenates a 50-year-old rule that limits collecting patent royalties after a patent expires. On June 22, 2015, the Court upheld its per se Brulotte rule that bars a patent licensor’s collection of royalties for the use of a claimed invention beyond the expiration date of the underlying patent. The Court directly addressed criticisms of this rule, which originated in its Brulotte v. Thys Co. (1964) decision, and foreclosed any speculation about the continued viability of Brulotte’s bright-line rule in current practice.

The facts of Kimble represent a common issue in patent agreements: constructing a license or settlement agreement that encompasses patent and non-patent rights beyond the expiration date of the underlying patent. In 1997, Kimble sued Marvel for patent infringement and breach of verbal agreement, claiming that Marvel used his patented invention and “ideas and know-how” for its toy—the Spider-Man Web Blaster. While the case was on appeal in 2001, the parties reached a settlement. As part of the settlement agreement, Marvel agreed to purchase Kimble’s patent for an upfront payment plus a royalty payment of 3% of “net product sales.” The settlement agreement also released Marvel, except for its obligations under the settlement agreement and the alleged verbal agreement. The settlement agreement had no expiration date, no time limit on Marvel’s obligation of 3% royalty payment, and no reduction of royalty rate after patent expiration. Several years later, in 2008, disagreements arose between the parties concerning the royalty payment under the settlement agreement. Kimble then sued Marvel for breach of contract and related claims. Marvel counterclaimed, after it became aware of Brulotte during litigation, seeking declaratory judgment that it would not owe royalties after the expiration of the underlying patent.

The district court, reading the settlement agreement as a hybrid license (granting patent and non-patent rights), held that Brulotte precluded Kimble from recovering royalties beyond the expiration of the underlying patent. The Ninth Circuit “reluctantly” affirmed the district court, holding that a “licensing agreement encompassing inseparable patent and non-patent rights is unenforceable beyond the expiration date of the underlying patent, unless the agreement provides a discounted rate for the non-patent rights or some other clear indication that the royalty at issue was in no way subject to patent leverage.” Echoing its previous criticism, the Ninth Circuit noted that “Brulotte ‘runs counter to the usual task in a contract case – to interpret the terms agreed upon by the parties,’” and it “renders some aspects of otherwise valid contracts unenforceable [for the unconvincing economic reason] that ‘the free market visualized for the post-expiration period would be subject to monopoly influences’ if ‘a royalty agreement was allowed to project beyond the expiration date of the patent.’” Kimble appealed to the Supreme Court asking the Court to overrule Brulotte’s per se rule and adopt a “rule of reason” for assessing post-expiration royalties. Several amici, including Intellectual Property Law Association of Chicago, New York Intellectual Property Law Association, University of Massachusetts Biologic Laboratories, Center for Intellectual Property Research of the Indiana University, and Intellectual Property Owners Association, filed briefs in support of overturning Brulotte because it supposedly relies on out-dated economic assumptions.

Breaking from its recent trend of reversing lower courts on patent law issues, the Supreme Court affirmed the Ninth Circuit in a 6-3 decision. Relying on the doctrine of stare decisis, the Court reasoned that Kimble did not provide the “‘special justification’—over and above the belief ‘that the precedent was wrongly decided’”—needed to overturn Brulotte. In fact, the majority pointed out that because Brulotte lies at the intersection of patents (property law) and agreements (contract law), “superspecial,” and not just traditional, justification was needed to overturn Brulotte. Kimble failed to summon such justification. Thus, Brulotte and its underlying rationale remain valid and provide a guiding principle for patent agreements: upon patent expiration, its claimed invention “passes to the public,” and any contract provision limiting the public’s free use of the invention undermines the limited monopoly granted with a patent.

The Court also addressed Kimble’s reasons for overturning Brulotte: first, Brulotte rests on a mistaken view of the competitive effects of post-expiration royalties; and second, Brulotte suppresses technological innovation and thus harms the economy. Rejecting both reasons, the Court noted that although Kimble’s reasoning “may give Congress [a] cause to upset Brulotte, . . . [it] does not warrant this Court’s doing so.” Had the Court overturned Brulotte and replaced its per se rule with a more flexible “rule of reason” analysis proposed by Kimble, the contracting parties would have had more options for allocating royalties beyond the life of a patent. But, even with the Court’s affirmance of the bright-line rule, creative ways exist to avoid running afoul of Kimble and Brulotte. For example, agreements can extend the payments for pre-expiration patent use into the post-expiration period; multi-patent agreements can extend the royalties until the latest-running underlying patent expires; hybrid agreements granting patent and non-patent rights can utilize a layered royalty plan, with a reduced royalty rate upon patent expiration; and the contracting parties can enter into a joint venture and other business arrangements. As noted by the Kimble Court, Brulotte permits all such arrangements.

Thus, while Kimble maintains a bright-line rule for the royalties tied to the post-expiration use of the underlying patents, Kimble permits a number of creative licensing and other business arrangements. To ensure that Brulotte’s per se rule does not apply in such arrangements, the contracting parties should endeavor to make clear that any post-expiration royalty payment is not for the post-expiration use of the claimed technology. The parties can accomplish this by expressly reciting the clarification in the agreement.

And, the Court’s renewed interest in Brulotte reaffirms not only the existence of the rule (the parties in Kimble overlooked it during the contract formation), but also the importance of strategically prosecuting patent applications. Patent licenses can bring in significant day-to-day revenue towards the end of their term. Brulotte cuts off that revenue stream the day the patent expires. Thus, to maximize the patent term and potential licensing revenue, patent-holders should avoid applicant delays when shepherding their applications through the U.S. Patent and Trademark Office.

The Author

Jeremiah B. Frueauf & Dr. Pratibha Khanduri

Jeremiah B. Frueauf & Dr. Pratibha Khanduri  

Jeremiah B. Frueauf is a director in the Biotechnology/Chemical Group, at Sterne, Kessler, Goldstein and Fox PLLC in Washington, DC. Mr. Frueauf counsels domestic and international clients on the preparation, prosecution, and management of complex worldwide patent portfolios. He is also experienced in the research and preparation of freedom-to-operate, validity, infringement, and patentability analyses.

Mr. Frueauf has experience in various inter partes matters, including district court litigation, interference work before the U.S. Patent and Trademark Office, and Section 337 investigations before the U.S. International Trade Commission. His work includes preparing strategy and analysis, motions practice, and case management for these matters.

Pratibha Khanduri, Ph.D. is an associate at Sterne, Kessler, Goldstein and Fox PLLC in Washington, DC. Dr. Khanduri is an associate in the firm's Biotechnology/Chemical group. She assists in the preparation and prosecution of patent applications, in reexamination proceedings, and in patent litigation matters. In addition, Dr. Khanduri is involved in preparing patentability, invalidity, freedom-to-operate, and non-infringement opinions. Her areas of technical expertise include genetics, molecular biology, biochemistry, and cellular biology.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

Discuss this

There are currently 7 Comments comments.

  1. Next July 13, 2015 9:59 am

    I still think the Supreme Court got it right on this one.
    “Brulotte rests on a mistaken view of the competitive effects of post-expiration royalties” – how can this be “mistaken”? The patent rights have expired, the point of the contract is over – the quid prop quo has lost the quid. Makes perfect sense to me. And to me, this rule strengthens the paradigm of patents. If contracts were allowed to out live patent rights, this would only add murkiness to the 20 year patent life. A patent owner is granted a 20 year right of exclusivity…that’s it, end of story!

  2. Gene Quinn July 13, 2015 5:42 pm

    Next-

    The point of the contract is not over if the acquiring party has agreed to pay post patent royalties. The rule fundamentally restricts freedom of contract. There is nothing philosophically wrong about an acquiring party to want to acquire a patent license so badly that they agree to pay royalties beyond the expiration of the patent. The Supreme Court saying that can’t be done forces all royalties to be paid during the patent term. Saying no to patent royalties post term after they have been agreed is simply to rewrite the terms of the contract agreed to by the parties.

    As for you saying that it would add murkiness, that is hardly correct. After the patent expires anyone who didn’t contractually obligate themselves to pay post patent royalties wouldn’t have to pay anything to use the patented innovation. But those who agreed as a part of the bargain struck should have to abide by the terms of the contract to which they agreed. Again, it has nothing to do with patents, but everything to do with freedom to contract.

    -Gene

  3. Anon July 13, 2015 6:20 pm

    Next,

    The Court itself states that Brulotte was wrong – just not “wrong enough.”

    Further, all this does is create a trap for the unwary, and instigate what the Court is on record as being against: clever drafting (usually associated with the derogatory “scriveners.”

    Being aware of this “rejuvenation” will stop not a single attorney worth their salt from drafting an equivalent contract to have some type of payment (for some othe nominally named feature) extending past the patent expiration date.

    What this really accomplishes is a mere revealing that the Court has it out for patents. There really is no other viable explanation for attempting to make this change “super special” when past decisions (going against patents – think 101, think eBay**, think KSR) so readily make light of any notion whatsoever of patents “being special.”

    **eBay as is commonly viewed, which is done so mistakenly, but that’s a different topic.

  4. Curious July 13, 2015 9:41 pm

    If contracts were allowed to out live patent rights, this would only add murkiness to the 20 year patent life. A patent owner is granted a 20 year right of exclusivity…that’s it, end of story!
    Maybe I should try that logic to get out of my student loans. Why should I be forced to pay for something (i.e., a college education) that ended many, many years ago?

    The problem with your logic is that there is no need to tie the life of a patent with the royalties associated with that patent (or any other property for that matter). This tie between patent life and patent royalties has no tie to a statute and is based upon a long-debunked economic theory. Thus, there is no statutory or policy position to protect. This is just the Court meddling with the rights of the respective parties to contract with one another.

    Once you put these facts into a different context, you’ll realize that the Court has no leg to stand upon beyond invoking stare decisis.

  5. Curious July 13, 2015 9:49 pm

    Patent licenses can bring in significant day-to-day revenue towards the end of their term. Brulotte cuts off that revenue stream the day the patent expires. Thus, to maximize the patent term and potential licensing revenue, patent-holders should avoid applicant delays when shepherding their applications through the U.S. Patent and Trademark Office.
    One should always avoid applicant delays as a matter of course. However, one might consider that just because the patent expires that doesn’t mean that the revenue stream must also dry up — it all depends upon what you are licensing. It has been awhile since I’ve been actively involved in licensing. However, the licensing agreements I have seen always license more than just the patent (e.g., “know how,” “trade secrets,” “patentee’s expertise,” etc.). Therefore, there is an argument that the revenue stream can exist past the expiration of the patent since these other things still exist.

    Like most things, it comes down to how the licensing agreement is drafted — just food for thought.

  6. Anon July 13, 2015 9:50 pm

    Curious,

    It is even more insipid than that. Once the patent expires everybody else has full access.

    The “confusion” and “murkiness” just is not there. The only ones are those that voluntarily signed up (of their own free accord) to that deal.

  7. Anon July 13, 2015 9:52 pm

    Apologies – left out a word: “bound”

    The last sentence should read: The only ones bound are those that voluntarily signed up (of their own free accord) to that deal.