Supreme Court to Revisit Whether Agreement to Pay Royalties After Patent Expiration is Per Se Unlawful

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Kimble v. Marvel Enterprises Inc., No. 13-720

On December 12, 2014, the Supreme Court granted certiorari in Kimble v. Marvel Enterprises, Inc., to revisit and perhaps reconsider its prior decision in Brulotte v. Thys Co., 379 U.S. 29 (1964) holding per se unlawful patent license agreements which continued royalty obligations after expiration of the patent. Notably, certiorari was granted notwithstanding the Solicitor General counseling against it.

In Kimble, the Ninth Circuit “reluctantly” applied Brulotte to find that Marvel owed no further royalties to Kimble under an agreement the parties negotiated to cover both patent and non-patent rights relating to Spider-Man toys. Kimble v. Marvel Enterprises, Inc., 727 F.3d 856 (9th Cir. 2013).

Kimble filed an application for a patent covering a toy allowing the user to mimic Spider-Man’s web-shooting abilities, and discussed his ideas with Marvel. Marvel verbally agreed to compensate Kimble should it use any of Kimble’s ideas, but after consideration said it was not interested. Nevertheless, Marvel began manufacturing a similar Spider-Man toy, so Kimble sued for patent infringement and breach of contract. The court entered summary judgment of non-infringement, but a jury returned a verdict in favor of Kimble on his breach of contract claim. While the case was on appeal, Kimble and Marvel settled. As part of the settlement agreement, Marvel agreed to purchase Kimble’s patent and pay Kimble 3% of Marvel’s net product sales, which was defined to include both sales that would infringe the patent and sales of Marvel’s Web Blaster. The settlement agreement had no expiration date and no provision discounting the royalty rate after the assigned patent expired in 2010.

A dispute over royalty payments arose, and in 2008 Kimble sued Marvel for breach of the settlement agreement. Marvel argued that under Brulotte, it was not required to pay royalties after the 2010 expiration of the assigned patent. The district court agreed with Marvel, and on July 16, 2013, the Ninth Circuit affirmed.

In affirming, the Ninth Circuit reviewed Brulotte in which the Supreme Court held “that a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” Kimble, 727 F.3d at 860 (quoting Brulotte, 379 U.S. at 32). Brulotte and its progeny, the Ninth Circuit stated, “creat[ed] two bright line rules[.]” Id. at 863. First, “no contract can properly demand royalty patent after the patent expires.” Id. Second, “a contract that provides for royalties either when a patent expires or when it fails to issue cannot be upheld unless it provides a discount from the alternative, patent-protected rate.” Id. Because the Kimble-Marvel settlement agreement provided one royalty rate for both patent and non-patent rights without a post-patent-expiration discount, Kimble could not Page 1 of 2 12/15/2014 collect royalties after the patent expired.

The Ninth Circuit stated however that Brulotte is “counterintuitive” and that “its rational is arguably unconvincing.” Id. at 857. The Court noted that Brulotte’s holding was based on the assumption that post-patent-expiration royalties are “on their face a bald attempt to exact the same terms and conditions for the period after the patents have expired as they d[id] for the monopoly period.” Id. at 861 (quoting Brulotte, 379 U.S. at 32). The Ninth Circuit pointed out, however, that when the patent expires, anyone can make the patented product, and so Brulotte’s assumption that the patentee extends his monopoly in violation of the law is not true. Id. at 866 (quoting Scheiber v. Dolby Labs., Inc., 293 F.3d 1014, 1017 (7th Cir. 2002)). Royalties owed beyond the expiration of the patent may be, for example, a way for a licensee to owe a lower royalty over a longer period of time instead of a (possibly unaffordable) higher royalty rate over the shorter period of time in which the patent is in force. Id.

In its December 3, 2013 Petition for a Writ of Certiorari, Kimble framed the Ninth Circuit’s criticism of Brulotte as exemplary of a wide-spread consensus of courts, the government, and academia that Brulotte should be reconsidered if not overruled because Brulotte’s primary premise is fundamentally wrong, its key assumption has since been abandoned, and it has the effect of stifling innovation. Moreover, Kimble argued, Brulotte’s rigid per se rule is inconsistent the Supreme Court’s recent preference for the contextualized rule of reason in antitrust cases.

On June 2, 2014, the Supreme Court invited the Solicitor General to file an amicus brief commenting on whether it should grant certiorari. The Solicitor General argued that Kimble was a poor vehicle for reconsidering Brulotte, that the petitioner offered unconvincing reasons to revisit Brulotte, and that stare decisis counseled against reviewing statutory-interpretation decisions like Brulotte. The Supreme Court nonetheless granted certiorari.

The case will be watched with interest, both for its potential impact on patent licensing agreements and more broadly for what the Supreme Court views to be its proper role in legal rule-making.