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.