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U.S. Supreme Court Affirms Rule Precluding Post-Expiration Patent Royalty Payments

Posted on Jun 29, 2015 in Blog

In 1991, Kimble patented a toy glove that enabled a user to shoot a pressurized string from it. Kimble attempted to sell or license the patent to Marvel Entertainment for Marvel’s Spider-Man character. Marvel declined. However, Marvel started to sell a toy which Kimble alleged infringed the patent, so Kimble brought suit for infringement of its patent. The parties settled the matter under which Marvel bought the patent for a lump sum and agreed to pay a running royalty to Kimble on future sales of Marvel’s toy. The agreement didn’t have an end for the payment of the running royalty. More than a decade later Marvel filed suit for a declaratory judgment alleging that it needn’t continue to pay the running royalty for its sales of its toys after the expiration of the patent. Marvel based its position on the 1964 opinion of the Supreme Court in Brulotte v. Thys Co., 379 U.S. 29 (1964) which held: “a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” The district court granted Marvel the relief it sought and the Court of Appeals for the Ninth Circuit affirmed the district court. Kimble appealed.

In its 6 – 3 opinion in Kimble et al. v. Marvel Entertainment, LLC, successor to Marvel Enterprises, Inc., issued on June 22, 2015, the Supreme Court, speaking through Justice Kagen, affirmed the Court of Appeals. Justices Alito, Roberts and Thomas dissented.

While acknowledging that “[t]he Brulotte rule … prevents some parties from entering into deals they desire,” the Court was reluctant to overturn Brulotte. To do so would be counter to the concept of “stare decisis” (the doctrine of precedent), which the Court felt was particularly important in the areas of patents and licenses, since contracting parties “are especially likely to rely on such precedents when ordering their affairs.” According to the Court, to overrule Brulotte would require a “superspecial justification”, and none was found to exist in this case.

Thus, the 50-year-old Brulotte rule precluding post-expiration royalty payments remains the law.

However, all is not lost for parties seeking to structure deals without violating the Brulotte rule. For example, the parties can provide that payments for use of an invention during the patent’s term be amortized to extend into a period after the patent has expired (post-expiration). Royalties can be tied to multiple patents. Moreover, post-expiraton royalties can be tied to a license to a trade secret, know-how or some other non-patent right, e.g., the licensee pay a certain percentage royalty during the life of the patent and a lesser percent for the trade secret/know-how after the patent expires. Further still, joint ventures and other business arrangements can be established in lieu of post expiration royalties to confer benefits on the patent owner after the patent has expired.

With the above in mind, it becomes clear that careful attention should be paid to the language of any agreement involving the sale or licensing of a patent if it entails payments to the patent owner or licensor which would occur after the expiration of the patent.

We at Caesar Rivise are ready, willing and able to assist you in that endeavor.

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