Supreme Court: No Patent Royalties May Accrue After Patent Expiration
With Kimble v. Marvel Entertainment, LLC, the U.S. Supreme Court upheld the controversial Brulotte v.Thys Co. decision, which prohibited collection of patent-based royalties that accrue after patent expiration. The Court expressly supported alternative licensing terms and business arrangements to avoid Brulotte’s per se rule. In navigating these potential alternatives, patent licensors and licensees should confer with an attorney before drafting or signing a licensing agreement involving the payment of royalties to ensure their contractual expectations are met.
On June 22, 2015, the U.S. Supreme Court ruled in Kimble v. Marvel Entertainment, LLC (slip op., No. 13-720) it would not "undecide" one of its widely criticized patent decisions, and reiterated the per se rule against licensing agreements that accrue royalties after the expiration of the licensed patent. Stephen Kimble patented a toy device that shoots spider-like string from a person’s wrist, enabling a user to emulate Spider-Man. When Marvel began to commercialize a toy very similar to Kimble’s, Kimble filed a patent infringement claim against Marvel. As part of a settlement agreement, Marvel agreed to pay royalties to Kimble, with no end date on the collection thereof. After entering into the settlement with Kimble, Marvel learned about Brulotte – that extending a patent licensing agreement’s royalty payment beyond the life of the patent constitutes patent misuse per se under the Brulotte ruling. Armed with Brulotte, Marvel sought a declaratory judgment in district court permitting the termination of royalties upon the patent’s expiration. The district court dutifully ruled that Brulotte controlled, which meant that Marvel only had to pay royalties to Kimble during the life of Kimble’s patent. The Ninth Circuit begrudgingly applied Brulotte to affirm the district court’s ruling, and Kimble swiftly lost the ability to collect royalties on his patent after its expiration date.
The Supreme Court affirmed the Ninth Circuit’s ruling, avoiding many of the underlying substantive issues with Brulotte. The Court instead relied on, as Justice Kagan described it, "superpowered" stare decisis ("today’s Court should stand by yesterday’s decisions"), requiring a "superspecial justification to warrant reversal." Justice Kagan first noted that the Court has always "carefully guarded th[e] cut-off date" of patent expiration, past which a patentee may no longer exercise the monopoly that had been conferred by the patent. Justice Kagan highlighted that Brulotte, which involved the license of hop-picking machines and related patents, was "brewed in the same barrel." In the Brulotte case, not only had Thys Co. licensed the use of the machines and patents, it had placed additional restrictions on the use of each machine. Pivotally, the licensing agreement did not specify an end date for the royalty payments, so the Court found that "[t]he royalty payments due for the post-expiration period are, by their terms, for use during that period, and are not deferred payments for use during the pre-expiration period." The agreement may have seemed practical, but the Brulotte Court held that once a patent expires, that intellectual property then belongs to the public, irrespective of the parties’ intent. Confidently, it held that "projection of the patent monopoly after the patent expires is not enforceable."
Brulotte has been widely criticized for disallowing economically practical licensing agreements that spread out risk and cost over a longer royalty payment period, simply because they extend beyond a patent’s expiration. However, the Kimble majority declined to engage in an analysis of Brulotte’s substantive underpinnings, instead performing an extensive analysis of the principles of stare decisis. The Kimble majority characterized stare decisis in this case as "superpowered" because the Brulotte Court, in making its ruling decades ago, was largely interpreting the patent laws written by Congress. As Congress could have legislatively "corrected" the Brulotte Court’s interpretation of its laws, and as Congress in fact has amended the patent laws several times since Brulotte without passing any legislation to affect the Brulotte Court’s ruling, Justice Kagan argued for judicial restraint.
Ironically, in declining to confront Brulotte’s substantive reasoning, Justice Kagan explicitly suggested several alternatives contracting parties may employ in their licensing agreements to "find ways around Brulotte, enabling them to achieve those same ends" – the same ends that the Brulotte ruling seeks to prevent. The following suggested licensing alternatives permit the collection of post-expiration payments, but according to the Brulotte Court, would not constitute per se patent misuse:
- "Tying" the license of a patent and the use of a non-patented right together, but collecting royalties only on the non-patented right after the patent’s expiration. Justice Kagan explained that "a license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone)."
- Grouping multiple patent licenses in one licensing agreement to allow collection of royalties up until the date of the last patent’s expiration.
- Deferring payments that would be collected only during the pre-expiration period "into the post-expiration period."
- More generally, creating joint venture business arrangements that allow parties to share in the costs and profits of an enterprise, rather than the payment of royalties.
Because Kimble reaffirmed that the doctrine of patent misuse is alive and well, the remedies customarily imposed by courts upon a finding of patent misuse will likely remain authoritative. When faced with a patent misuse defense, courts generally will not enforce a patent’s royalty-collecting power until the misuse is purged, per the doctrine of "unclean hands." This means courts will likely purge from a licensing agreement any royalty payment obligations past the date of expiration, unless a licensor utilized an alternative to Brulotte, as detailed above. Kimble saw his royalty payment period cut short because he employed no such exception. The Court, unsympathetic to Kimble’s mistake, has unquestionably warned the patent community: beware of Brulotte.
Members of Saul Ewing’s Life Sciences and Intellectual Property & Technology Practices are experienced in protecting intellectual property and negotiating and structuring license agreements. For more information on the implications of this Supreme Court decision, or assistance with agreements that have a licensing component, please contact author Jay Reilly or the attorney at the firm with whom you are regularly in contact.