United States: Post-Expiration Royalties Remain Stuck In Web Of 50-Year Precedent

On June 23, 2015, the United States Supreme Court upheld a 50-year old prohibition against a patent owner collecting royalties following the patent's expiration. In Kimble et al. v. Marvel Entertainment, LLC, 576 U.S. ___ (2015), the Court relied on the principle of stare decisis and refused to overturn Brulotte v. Thys Co., 379 U.S. 29 (1964) which judicially created the rule that contracts for patent royalties following expiration of the patent were unenforceable.

Kimble stems from an agreement between Stephen Kimble and Marvel Enterprises, LLC for the purchase of U.S. Patent No. 5,072,856, a patent covering a toy that allows one to role-play a "spider person" by shooting pressurized foam string from the hand. Marvel sells a "Web-Blaster" in its Spider-Man line of toys that Kimble previously alleged infringed upon the '856 patent. To resolve that dispute, Kimble and Marvel entered an agreement through which Marvel purchased Kimble's patent and agreed to pay 3% royalties on Marvel's sales of the Web-Blaster. The agreement specified no end date for the royalties. The patent expired in 2010. Marvel filed suit seeking a declaratory judgment that its obligation to pay royalties to Kimble ceased upon the patent's expiration per the Brulotte rule. After Marvel succeeded at the district court and before the Ninth Circuit Court of Appeals, Kimble sought to have the Supreme Court overturn Brulotte and eliminate the legal prohibition to extending royalties longer than the life of a patent. In a 6-3 decision, the Supreme Court declined.

Brulotte has been criticized by some of the lower courts1, including by the Ninth Circuit panel decision in Kimble itself.2 Judges have not been alone in their criticism. Many academics3 and practitioners have been similarly unsparing in their critiques. Indeed, the senior author of this alert (read, "ancient") and his co-author (even more ancient) of Modern Licensing Law have severely criticized the Brulotte rule, invoking Justice Harlan's incisive dissent in Brulotte:

Justice Harlan's dissent recognizes that pricing of the use of the patent is a complex, market-driven matter. The fact that payments are to be made post-expiration (perhaps even based on post-expiration uses), based on a package of licenses, geared to total sales, cover a variety of intellectual property or products—all of which were suspect or condemned at one time—do not reflect patent leverage or coercion in and of themselves. Nor do they expand the claims or the scope of the patent. Decisions about price reflect market calculations of value. What is at issue is not whether the patent is being used beyond its boundaries, but whether the assessment of value is skewed by the presence of market power, by a set of actions beyond the pale of the rule of reason, or by actual coercion. The long and short of the matter is that modern antitrust principles and rule of reason analysis, coupled with traditional judicial tools to confront fraud and coercion, are much better suited than per se or artificial rules that presume a harm or use of leverage that may not in fact be present.4

The Supreme Court clearly was not moved by any of the criticisms of Brulotte. Justice Kagan, writing for the majority, held that stare decisis required the Court to uphold the Brulotte rule. The Court first noted that a patent holder's exclusivity rights are limited in time. "[W]hen the patent expires, the patentee's prerogative rights expire too." Slip Op. at 3. After examining the creation and applications of the Brulotte rule, the Court discussed stare decisis generally and noted that "[o]verruling precedent is never a small matter" and requires "special justification," defined as "over and above the belief that the precedent was wrongly decided." Slip Op. at 7-8. Recognizing that stare decisis "carries enhanced force" when the precedent interprets a statute, as opposed to a constitutional right, the Court discussed the opportunities which Congress had—but did not exercise—to overturn Brulotte. The fact that the Brulotte rule was based in both property and contract principles further supported the Court's decision to adhere to stare decisis because parties may have relied on Brulotte in structuring agreements.

Kimble, arguing that the rule was outdated and contrary to current economic principles, proposed a "rule of reason" application similar to that used in antitrust law. The Court held that, even if Kimble's arguments are founded in fact, it is for Congress, not the Court, to "fix it." Slip. Op. at 14-15. Oddly enough, Congress did not impose the Brulotte rule in the first place; the Supreme Court could have, as it has in other circumstances, untangled the web it made.

Footnotes

1. Zila, Inc. v. Tinnell, 502 F.3d 1014 (9th Cir. 2007); Scheiber v. Dolby Laboratories, Inc., 293 F.3d 1014 (7th Cir. 2002).

2. Kimble v. Marvel Enterprises Inc., 727 F.3d 856, 864-865 (9th Cir. 2013), affirmed 576 U.S. ___, 135 S. Ct. 781 (June 22, 2015).

3. See, e.g., 10 P. Areeda & H. Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application¶1782c.3, pp. 554–556 (3d ed. 2011); Caprio, The Trouble with Brulotte: the Patent Royalty Term and Patent Monopoly Extension, 1990 Utah L. Rev. 813, 814, 851.

4. Nimmer and Dodd, Modern Licensing Law, §13:31 (2014-2015 ed.).

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