December 15, 2014

Supreme Court to Decide Whether License Agreements May Require Payment of Royalties After Patent Expiration

The U.S. Supreme Court Friday agreed to revisit a longstanding precedent that bars patent owners from collecting royalties after their patents have expired, even if those post-expiration payments represent compensation for pre-expiration use of the patent. The Court’s decision will likely have important implications for the way in which patent licenses and similar agreements are structured. The case is Kimble v. Marvel Enterprises, Inc., No. 13-720.

The issue in Kimble was first posed to the Court 50 years ago in Brulotte v.Thys Co. In that case, a patent owner required buyers of its invention to sign license agreements that required them to pay royalties after the patent expired. A dispute later arose, and the licensees refused to pay royalties, alleging that the patent owner had misused the patent by demanding royalties beyond the statutory term of the patent. The Supreme Court agreed, finding that the licenses were “on their face a bald attempt to exact the same terms and conditions for the period after the patents have expired as they do for the monopoly period,” and concluding that “a patentee's use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.”

The Brulotte rule has been significantly criticized over the years both by courts and commentators, who have suggested that its economic analysis is inconsistent with modern antitrust principles. These critics typically argue that post-expiration royalties do not improperly extend the patent term, but merely represent delayed compensation for the licensee’s use of the patent. Defenders of Brulotte typically argue that the rule is not rooted in antitrust considerations, but rather reflects the basic patent law principle that formerly patented inventions should be free to all once the patent expires.

The facts of Kimble closely parallel those in Brulotte. Kimble owned a patent on a “Spider-Man” glove that allows a user to shoot pressurized foam string from the palm. Marvel sold a similar toy called the “Web Blaster.” Kimble sued Marvel for breach of contract and patent infringement, and to settle that case Marvel agreed to pay a royalty of 3% of product sales. A dispute over the settlement agreement arose, and Marvel argued that it was not required to continue paying royalties after 2010, when the patent expired. The District Court and the Ninth Circuit agreed, holding that they were bound by Brulotte (though the Ninth Circuit characterized the Brulotte rule as “counterintuitive and . . . arguably unconvincing”). Kimble then sought Supreme Court review, framing the question as whether Brulotte should be overruled. The Court asked the federal government for its views, and the Solicitor General opposed Kimble’s request, arguing that there was no compelling reason to revisit Brulotte and that the rule of stare decisis should apply. Nonetheless, the Court agreed to hear the case and revisit the Brulotte rule.

Kimble will be set for argument in March or April and will be decided by June. Amicus briefs in support of Kimble (i.e., seeking to overrule the Brulotte rule) are currently due February 2, 2015, and briefs supporting Marvel (supporting the Brulotte rule) are due March 4, 2015.