On Monday, June 22, 2015, the Supreme Court reaffirmed its earlier precedent barring royalties on a patent after the patent term expires. Kimble v. Marvel Entertainment, LLC, No. 13-720 (U.S. June 22, 2015). Justice Kagan penned the opinion (filled with colorful superhero references) and was joined by Justices Scalia, Kennedy, Ginsburg, Breyer and Sotomayor. Justice Alito penned a dissenting opinion joined by Justices Roberts and Thomas.
In this case, Kimble sold a patent to Marvel covering “a toy that allows children (and young-at-heart adults) to role-play as ‘a spider person’ by shooting webs—really pressurized foam string—‘from the palm of [the]hand.’” Kimble, slip op. at 1 (citing U.S. Patent No. 5,072,856, Abstract (filed May 25, 1990)). In return, Marvel paid Kimble a lump sum, and also agreed to pay a 3% royalty on Marvel’s future sales – the parties set no end date for royalties. Id. at 2. Before the expiration of the patent, Marvel discovered Brulotte v. Thys Co., 379 U.S. 29 (1964), earlier Supreme Court precedent ruling that royalties could not be collected for use of a patent after the expiration of its term. Id. On that basis, Marvel brought and won a declaratory judgment excusing it from post-expiration royalties, which the 9th Circuit Court of Appeals affirmed. Id. at 2-3.
Justice Kagan’s opinion relied primarily on the doctrine of stare decisis in affirming the 9th Circuit and Brulotte. See Id. at 7-12. The Court found that there was no “special justification” to overturn Brulotte, particularly when Brulotte relied on interpretation of the patent statute, and in particular a section of the patent statute that has not changed since Brulotte. Id. The Court also emphasized that it was ultimately up to Congress to decide whether or not to overturn Brulotte, which it had specifically declined to do. Id. Instead, the Court relied upon the basis that “Congress had made a judgment: that the day after a patent lapses, the formerly protected invention must be available to all for free,” and that “[a]ny attempt to limit a licensee’s post-expiration use of the invention, ‘whatever the legal device employed, runs counter to the policy and purpose of the patent laws.’” Id. at 5, 15.
The Court acknowledged that the Brulotte rule, “like others making contract provisions unenforceable, prevents some parties from entering into deals they desire.” Id. at 5. However, the Court made it clear that Brulotte only prohibited royalties for using an invention after expiration, and gave clear examples to “find ways around Brulotte, enabling them to achieve those same ends,” including:
- deferring payments for pre-expiration use into the post-expiration period;
- linking royalty payments to later-expiring patents covered in the parties’ agreement; and
- tying post-expiration royalties to non-patent rights, even when closely related to a patent, e.g.: tying a license to both a patent and a trade secret, where the royalty may continue on the trade secret after the patent expires; and “all kinds of joint ventures, for example—that enable parties to share the risks and rewards of commercializing an invention.” Id. at 5-6.
The dissent disagreed that Brulotte was based on statutory construction, but instead on “debunked” economic theory. Kimble, slip op. dissent at 1(Alito, J., dissenting). The dissent also disagreed on practical terms that parties can so easily work around Brulotte, arguing that “[e]xtending a royalty term allows the parties to spread the licensing fees over a longer period of time, which naturally has the effect of reducing the fees during the patent term.” Id. at 3-4.
Both opinions spin a case like Kimble differently. The majority claims that parties who do not specify an end-date to a patent royalty are relying on Brulotte to end the obligation to pay royalties when the patent expires. Kimble, slip op. at 9-10. The dissent however argues that parties are not always aware of the prohibition, and may end up with a vastly different deal than they bargained for once the Brulotte rule is discovered. Kimble, slip op. dissent at 4(Alito, J., dissenting). Regardless, Kimble makes it clear that royalty agreements that run beyond the expiration of a patent must be drafted very carefully, specifying how and why a royalty payment extends beyond the expiration of a patent term.
Client Alert 2015-175