Locke Lord QuickStudy: Supreme Court Keeps Spider-Man Maintaining The Status Quo - Royalties End When The Patent Expires

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    On June 22, 2015, the United States Supreme Court issued its decision in Kimble v. Marvel Entertainment, LLC, 576 U. S. ____  upholding a long-standing 50-year rule from Brulotte v. Thys Co., 379 U.S. 29 (1964) that prevents a patentee from receiving royalties for sales made after the patent’s expiration, which is typically 20 years from the filing of the patent application.  In the 6-3 ruling authored by Justice Elena Kagan, the Court recognized that royalties payable by Marvel to Kimble for a patent supporting Marvel’s Spider-Man franchise “endow[ed its] holder with certain superpowers, but only for a limited time.”  Kimble at 3.    In the words of Justice Kagan, discussing the Brulotte rule, “The decision is simplicity itself. A court need only ask whether a licensing agreement provides royalties for post-expiration use of a patent. If not, no problem; if so, no dice.”  Id. at 12.  Though Kimble does not mark a change in the law, it is notable in that the Court acknowledged the law may be wrong, but there exists no “superspecial justification” to reverse Brulotte and only Congress can change the rule against post-expiration royalties.

    In 1991, Stephen Kimble received U. S. Patent No. 5,072,856 (“the ‘856 Patent”) on a glove that allows a person to shoot pressurized foam string from the palm of the hand, thus imitating Spider-Man shooting a web from his palm.  In 1997, Kimble sued Marvel for use of the technology embodied in the ‘856 Patent without his permission.  In settling that litigation, the parties agreed that Marvel would purchase Kimble’s patent in exchange for a lump sum and a royalty on Marvel’s future sales of its Web Blaster.  The parties set no end date for royalties.

    In 2010, Marvel sought a declaration in Arizona District Court confirming that the company could cease paying royalties in 2010—the end of Kimble’s patent term.  The Arizona court sided with Marvel, holding that Brulotte made “the royalty provision . . . unenforceable after the expiration of the Kimble patent.” 692 F. Supp. 2d 1156, 1161 (Ariz. 2010).  The Court of Appeals for the Ninth Circuit affirmed, despite admonishing the Brulotte rule as “counterintuitive and its rationale [as] arguably unconvincing.” 727 F. 3d 856, 857 (2013).

    Wrong Law is Better Than Unsettled Law
    While recognizing that stare decisis “means sticking to some wrong decisions,” the Court believes it is “more important that the applicable rule of law be settled than that it be settled right.”  Id. at 7.  The Court relied heavily on the idea that today’s Court should stand by yesterday’s decisions—an idea called stare decisis—because it affords parties with consistent and predictable rules and protects existing agreements written with Brulotte in mind.  Id. at 7.  However, the dissent argued that the status quo harms competition and can unduly punish a patent holder and potential licensees.  For example, technology disclosed in a patent may be years—or even decades—away from being part of a marketable product, thus constraining or eliminating the ability to recoup investment.  Moreover, a potential licensee may want to avoid early outlays of capital while determining the viability of a technology.  The Brulotte rule, the dissent argued, strips private parties of its expectations while disallowing licensees to spread their costs and patent holders to capitalize on slow developing inventions.

    To support its decision to uphold Brulotte, however, the Court listed several ways parties could structure agreements to get around the rule, including (1) deferring payments for use during the patent term by amortizing or delaying some payments; (2) structuring agreements to include multiple patents, some of which run longer than others; (3) structuring agreements such that they involve a non-patent right—even when closely related to a patent—including trade secrets; or (4) entering a joint venture that allocates risks and rewards among parties.  There is precedent to such deals.  For example, in Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979), the Court upheld a clause that reduced the royalty payment in a licensing deal if the subject patent application never issued.  In that case, the Court found that the role the pending application played in the negotiation of the higher royalty played no part in the contract to pay the lower royalty indefinitely.  In Richardson v. Suzuki Motor Co., Ltd., 868 F.2d 1226 (Fed. Cir. 1989), the Federal Circuit upheld a clause that limited use or disclosure of trade secrets in the form of “technical information, know-how, inventions, use data, and design specifications.”  Similarly, in Universal Gym Equipment v. ERWA Exercise Equipment, 827 F.2d 1542 (Fed. Cir. 1987), the Federal Circuit upheld a clause to limit the use of “features, designs, technical information, or know-how.” 

    Moreover, parties can avoid the Brulotte rule by using creativity to draft license agreements.  For example, changing the royalty rate in response to an event other than one triggered by a patent may be enough to get around Brulotte.  Finally, relating a rate to disclosure of information for the most efficient use of a technology embodied in a patent also may be enough.  In the end, an agreement that goes beyond merely having a license to a patent will likely comply with the Brulotte/Kimble rule.

    For more information on the matters discussed in this Locke Lord QuickStudy, please contact the authors.

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