Ninth Circuit Holds Royalty Agreement Unenforceable

by: Robert Wagner, intellectual property attorney at Picadio Sneath Miller & Norton, P.C. (Robert Wagner on G+)

A recent decision from the Ninth Circuit in Kimble v. Marvel Enterprises Inc., No. 11-15605, highlights the problems parties can have when they enter into license agreements involving patents where the royalty payments extend beyond the life of the patents. In general, hybrid licensing agreements (those having inseparable patent and non-patent fights) are unenforceable beyond the expiration date of the patent unless either (a) there is a discounted royalty rate after the expiration date or (b) there is some clear indication that the royalty rate was not driven by leverage created by the patent rights. See Brulotte v. Thys Co., 379 U.S. 29 (1964). The rationale is that to hold otherwise would improperly extend the lifetime of the patent.

In Kimble, the inventor met with Marvel about his patented idea for a toy that children could use to mimic Spider-Man’s ability to shoot webs from his hands by shooting foam string from a glove. Kimble claimed the parties reached an oral agreement that Marvel would compensate Kimble if it used his ideas. Marvel then created a toy called the “Web Blaster” that was similar to what Kimble suggested. Marvel did not compensate Kimble, however.

Kimble sued for both patent infringement and breach of contract. The parties ultimately settled the case, with Marvel paying a lump sum to Kimble along with a perpetual 3% royalty on Marvel’s sales of these products. Eventually, the parties had a falling out regarding what products were covered by the agreement and the amounts due to Kimble.

The Court found that the agreement was a hybrid licensing agreement encompassing both patent and non-patent rights. Because there was no discount in the royalty rate post-expiration and there was no clear indication that the royalty rate was not subject to the leverage created by the patent, the post-expiration royalties were per se unenforceable.

The Ninth Circuit was not pleased to reach this result, however. It believed that the Supreme Court’s rule in Brulotte is “counterintuitive and its rationale is arguably unconvincing.” Nonetheless, it recognized that it was bound by this decision and that national uniformity on these issues is important.

The Kimble and Brulotte decisions highlight the importance of carefully considering the terms and duration of any licensing agreement that encompasses patent rights. Care must be taken to determine when any patent rights expire, what a royalty rate is based on, and how the two interact. With proper care ahead of time, problems like these can be avoided.