Tag Archives: royalties

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

In a 6-3 decision authored by Justice Kagan, the United States Supreme Court in Kimble v. Marvel Entertainment, LLC (No. 13-720) upheld the long-standing rule previously announced in Brulotte v. Thys Co., 379 U. S. 29 (1964), that patentees cannot charge royalties for the use of an invention after the patent covering the invention has expired. Justice Alito, joined by Chief Justice Roberts and Justice Thomas, dissented and would have abolished the rule announced in Brulotte.

We previously discussed the Ninth Circuit’s decision in this case here.

Background

In 1990, Kimble developed a web-shooting toy that allowed children to shoot foam strings from their hands like Spider-Man. He obtained a patent (U.S. Pat. No. 5,072,856) on his invention and offered it to Marvel Entertainment. Marvel declined, but soon afterwards came out with a similar toy. Kimble sued Marvel for patent infringement, and the parties ultimately settled the case. As part of the settlement, the parties entered into a license agreement that provided an up-front lump sum payment to Kimble along with a perpetual 3% royalty.

Some time later, Marvel discovered the Brulotte decision, which neither side was aware of during the settlement discussions, and moved for a declaration that its obligation to pay royalties expired when the patent expired. The district court, citing Brulotte, sided with Marvel, as did the Ninth Circuit. The Ninth Circuit, however, criticized the rationale of Brulotte, and the Supreme Court took up the case.

Analysis

The patent statute provides that patent owners have exclusive rights to the use and sale of their inventions for a limited period of time. Once that time expires, the invention falls into the public domain and can be used freely by anyone in this country.

The rule in Brulotte was announced as a way of preventing patent owners from extending their exclusive rights beyond the lifetime of the patent. The concern was that patent owners could use license agreements to force others to pay royalties long after the patent expired, which would artificially extent the lifetime of the patent.

Recently, economists have challenged the anti-competitive basis for the Brulotte ruling and noted that in some instances, allowing post-expiration royalties allows the user to obtain lower royalty rates (albeit spread out of a longer time), which can be pro-competitive behavior.

Justice Kagan, writing for the majority, ultimately decided that the principle of stare decisis controlled the outcome of the case. Brulotte was decided back in 1964 and represented the Court’s interpretation of the patent statute. In the case of statutory construction issues, the Court is disinclined to reverse itself without a significant reason for doing so. She noted that in the more than 50 years since the decision, Congress has not chosen to use its legislative powers to overrule this decision. She also noted that the economic concerns were far from conclusive.

The majority also noted that there were several ways that parties can construct license agreements that meet the limitations of Brulotte. For instance, parties can agree to spread out payments after the expiration of the patent, as long as the use/sale giving rise to the royalty occurred before the patent expired. Parties can also create hybrid agreements that include royalties for other intellectual property (such as trade secrets) if the royalty amount decreases after expiration of the patent.

In the end, the majority felt that there was not a sufficient reason to overrule Brulotte. Therefore, it affirmed the lower court’s rulings that the post-expiration royalties were barred.

The Dissent

The dissent took a different view. They felt that the economic rationale behind Brulotte was flawed and did not deserve deference. They also questioned the notion that Brulotte was decided by construing the patent statute. Instead, they felt that the decision was improper policymaking that should be overruled.

With respect to the particulars of the this case, they were concerned that the parties negotiated a resolution being unaware of the Brulotte rule, only to have Marvel come in afterwards and upset the prior agreed arrangement once it learned of Brulotte. Had the parties been aware of Brulotte during negotiations, they might have reached a different arrangement.

Conclusion

The Kimble decision does not change the state of the law. In a rather unusual move for the Supreme Court in the patent arena, they have maintained the bright-line rule that patent royalties based on actions that occur after a patent expires are not enforceable. Practitioners should be aware of this rule when crafting royalty agreements to structure them in a way to avoid this issue.