Supreme Court Upholds Prohibition Against Post-Expiration Patent Royalties

Supreme Court Upholds Prohibition Against Post-Expiration Patent Royalties

In its rather cheeky decision in Kimble v. Marvel Entertainment, LLC, 576 U.S. _____ (June 22, 2015), the U.S. Supreme Court refused to overturn a 50-year-old decision that bars collection of royalties for use of a patented technology after expiration of the patent. The Court's decision emphasizes the importance of patent license drafting and confirms that post-expiry royalties may be permissible if the payments are not solely for post-expiration use. But the decision highlights the risk that, unless careful, a patent licensor could inadvertently jeopardize collection of a portion of expected royalties.

In 1990, inventor Stephen Kimble obtained a patent on a toy glove that permits the wearer to mimic the comic book character Spider-Man by shooting pressurized foam string from the palm of the hand. Following litigation, Marvel Entertainment, LLC ("Marvel") entered into a settlement and license agreement with Kimble by which it agreed to pay a lump sum and running royalties of 3 percent on future sales of Kimble's web-shooter (which Marvel marketed as a Spider-Man "Web Blaster"), with no end date—as the Court put it, the parties expected that royalties "would continue for as long as kids want to imitate Spider-Man (by doing whatever a spider can)." Marvel later learned of the Brulotte decision and sought a declaratory judgment that it would no longer owe royalties after Kimble's patent expired in 2010. The district court entered judgment for Marvel. On appeal, the Ninth Circuit acknowledged criticism of the Brulotte rule but affirmed the judgment on the ground that it was bound by the Supreme Court decision. The Supreme Court granted Kimble's petition for certiorari, which presented a single question: "Whether this Court should overrule Brulotte v. Thys Co., 379 U.S. 29 (1964)."

In an opinion for six Justices that was larded with Spider-Man puns and references, Justice Kagan acknowledged possible shortcomings with the Brulotte rule but refused to overturn it. Relying on stare decisis, the Court declined Kimble's invitation to apply economic analysis or an antitrust rule of reason approach. The majority rejected the dissent's conclusion that Brulotte "was an antitrust decision masquerading as a patent case," finding that Brulotte was not based on a concern that post-expiration royalties harm competition. Rather, the majority concluded that Brulotte was grounded in the patent laws, and in particular the "categorical principle" that "all patents, and all benefits from them, must end when their terms expire." The Court noted that, in contrast to the antitrust rule of reason, Brulotte "is simplicity itself to apply." Accordingly, the Court concluded that Kimble's remedy lay with Congress, not the Court.

The Court's decision in Kimble serves as a reminder of the importance of properly structuring a technology license agreement. The Court acknowledged that post-term payment of royalties can serve legitimate purposes, such as deferring some royalty costs, better linking the total compensation to the long-term commercial success of the licensed products, and encouraging product development work. The Court noted that license agreements can be structured to accomplish these objectives without running afoul of Brulotte, by making it clear that a portion of the royalty payments for pre-expiration use of patented technology is deferred until after expiration. As another example, an agreement that combines a patent license with a license for trade secrets or know-how may permit post-expiration royalties for the latter while terminating patent royalties at expiration. But as the dissent noted, the Brulotte rule can act as a trap for the unwary and prevent a patent licensor from collecting the amount of royalties expected.

Kimble is also a reminder of the power—in this case, the "superpower"—of precedent. Brulotte survived, despite its flaws and criticisms, because of the doctrine of stare decisis. As Justice Kagan humorously put it in the Court's opinion, because Brulotte "lies at the intersection of two areas of law: property (patents) and contracts (licensing agreements)" where reliance interests generally counsel against upsetting settled expectations, that decision is entitled to a "superpowered form of stare decisis" that in turn would require "a superspecial justification for reversing Brulotte." Justice Kagan then concluded the Court's opinion with a quote from the 1962 comic book that introduced Spider-Man to the world: "[I]n this world, with great power there must also come—great responsibility." The Court thus concluded that while it had the power to overrule Brulotte, its "great responsibility" was to leave Brulotte intact and let Congress, should it desire, overrule Brulotte by legislation.

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