Yesterday, in a 6-3 decision in Kimble v. Marvel, the U.S. Supreme Court refused to overturn the long-standing rule that bars a licensor from being able to collect royalties for sales after the expiration of the licensed patent—even if the licensor and licensee explicitly agreed to just such a payment term. This so-called Brulotte rule is designed to prevent what is known as “patent misuse.” Justice Kagan, writing for the majority, upheld the rule on the basis of stare decisis—“stand by a decision”—the doctrine of precedent. The majority further reasoned that any decision to overturn the rule should be left to Congress. Justice Alito, joined by Chief Justice Roberts and Justice Thomas, dissented.

Kimble v. Marvel pitted a solo-inventor against a large entertainment company. In 1990, Stephen Kimble obtained a patent on a toy that shoots foam string from the wrist to imitate Spider-Man’s “web slinging” superpowers. Kimble sued Marvel for patent infringement for Marvel’s sale of its Web Blaster toy. The parties settled, with Marvel agreeing to pay a lump sum payment and a 3 percent royalty on Marvel’s future sales of the Web Blaster. The parties set no expiration date for the sales upon which Marvel would have to pay royalties. Later, Marvel invoked Brulotte and filed for and was granted a declaratory judgment that the company could cease paying royalties in 2010 when Kimble’s patent expired. The Ninth Circuit affirmed. Kimble sought certiorari to have the Brulotte rule overturned.

The Court, on the basis of stare decisis, declined to exercise its superpowers to overturn Brulotte. Justice Kagan explained that while stare decisis is “not an inexorable command,” it is the “preferred course because it promotes the evenhanded, predictable, and consistent development of legal principles, fosters reliance on judicial decisions, and contributes to the actual and perceived integrity of the judicial process.” Moreover, since commercial parties generally may have relied on Brulotte in structuring their transactions, the Court did not wish to upset settled expectations. Finally, the Court found no justification for overturning precedent, finding the Brulotte rule simple to apply, consistent with the important principle that the public be able to freely use the subject matter of a patent after it expires, and finding no evidence to support the argument that Brulotte unduly inhibits innovation. Accordingly, the Court did not overturn Brulotte.

Interestingly, the Court noted ways to contract around Brulotte. First, the Court offered that parties may extend payment beyond the life of a patent by deferring payments for pre-expiration sales into the post-expiration period, rather than improperly agreeing to pay royalties on post-expiration sales. The court offered as an example that a licensee could agree to pay its licensor a sum equal to 10 percent of sales during the 20-year patent term, but to amortize that amount over 40 years. While this would not allow the licensor to collect royalties for post-expiration sales, the Court noted that this “arrangement would at least bring down early outlays, even if it would not do everything the parties might want to allocate risk over a long timeframe.”

Second, the Court noted that parties can agree to pay royalties until the “latest-running patent covered in the parties’ agreement expires.” (Some circuit courts, however, have held licenses unenforceable for patent misuse where the licensor “coerced” the licensee into licensing a pool of patents and paying royalties regardless of whether the licensed product falls within the scope of any unexpired patents.) Third, the Court endorsed so-called “step-down” payment provisions, where royalties paid under a license for both patents and trade secrets can be set at one rate for the patent period, and a lower, or “stepped down,” rate after the patent expires, to compensate for the continued ability of the licensee to use the licensed trade secrets. Finally, the Court broadly noted that “Brulotte poses no bar to business arrangements other than royalties—all kinds of joint ventures, for example—that enable parties to share the risks and rewards of commercializing an invention.”

Ballard Spahr’s Intellectual Property Department comprises trial lawyers and counselors who are on the cutting edge of patent, trademark, unfair competition, copyright, trade secret, Internet, licensing, and trade dress matters. We bring and defend IP cases in courts throughout the country, and before the PTAB and TTAB. We have a deep bench of lawyers with advanced technical degrees who identify and protect our clients’ global intellectual property interests, and offer strategic prosecution and due diligence guidance relating to strategic product development, mergers and acquisitions and licensing, and portfolio restructuring.

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Copyright © 2015 by Ballard Spahr LLP.
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