Everything Old is New Again: Post-Expiration Patent Royalties are a Bad Idea!
June 26 2015
On Monday, the United States Supreme Court upheld the longstanding case law that prohibits a patent owner from receiving royalties after a patent has expired. In Kimble v. Marvel Entertainment, LLC (June 22, 2015) 2015 U.S. LEXIS 4067, the Court ruled in favor of Marvel, the licensee of a patent for a Spiderman web-shooting toy.
The plaintiff, Stephen Kimble, had patented the web-shooting toy. Kimble had talked to Marvel about licensing his patent, but Marvel declined to take a license. Shortly thereafter, Marvel began selling a suspiciously similar web-shooting toy.
Kimble sued Marvel for patent infringement. The parties settled. Pursuant to the settlement, Marvel bought the patent from Kimble for a lump sum and a three-percent royalty on future sells of the toys.
Marvel later filed a declaratory judgement action in the district court, seeking a judgment that Marvel could stop paying Kimble royalties when the patent expired in 2010. Marvel relied on Brulotte v. Thys Co., 379 U.S. 29 (1964), in which the Supreme Court had held that a patent owner could not receive royalty payments after the patent had expired, and that agreements that provided for post-term patent royalties were per se unlawful.
The district court ruled in favor of Marvel, agreeing with Marvel that Brulotte prohibited post-term patent royalties. The Ninth Circuit Court of Appeals affirmed the district court. On appeal to the Supreme Court, Kimble argued that the Court should overrule Brulotte. The Court refused to do so.
First, the Court explained that courts have carefully protected the rights of the public to make and sell inventions that were covered by patents that have expired. Just like unpatentable inventions, inventions whose patents have expired are in the public domain, and the public is free to use them. As set forth in 35 U.S.C. §154, a patent expires twenty years from its filing date. At that time, the patent owner’s rights to exclude others from practicing the invention end. The Court reiterated the Brulotte Court’s conclusion that this rule is consistent with the policy of the patent laws to limit a patent owner’s monopoly to the term of the patent.
Next, the Court acknowledged that Brulotte’s per se rule hinders certain kinds of deals in which parties want to extend royalty payments over a longer period of time to cover the life of the product. As the Court explained, however, there are alternative arrangements that achieve the same result. For example, parties may agree that the licensee will pay a ten percent royalty over the twenty-year life of the patent, but that the payments will be amortized over forty years. Parties may also agree to license other, non-patent rights, such as trade secrets, that do not expire. Parties may enter into joint ventures or other business transactions to share the risks and profits of commercializing a patented product.
Kimble argued that the Court should replace the Brulotte per se rule with a flexible, case-by-case antitrust-type of “rule of reason.” According to Kimble, the analysis should focus on the relevant product market and whether the patent owner has the power to limit competition.
The Court emphasized that the doctrine of stare decisis requires “sticking to some wrong decisions” because it is “more important that the applicable rule of law be settled than that it be settled right,” (quoting a 1932 Supreme Court case). Id. at *15. According to the Court, stare decisis is only relevant when it is used to maintain incorrect decisions, as a correct decision will be affirmed on its merits. Thus, in order to overcome stare decisis, there must be some “special justification” in addition to a previous wrongful decision. Id. The Court noted that stare decisis is even more important when the prior case interprets a statute (as was true with Brulotte, which interpreted the patent term statute, 35 U.S.C. §154), and pointed out that Congress has had many chances to change the law and overrule Brulotte. In fact, Congress has considered legislation that would change the Brulotte rule into a flexible rule similar to the rule of reason that Kimble proposed.
The Court agreed with Marvel that parties may have been relying on Brulotte in entering into licenses. “Overturning Brulotte would thus upset expectations, most so when long-dormant licenses for long-expired patents spring back to life.” Id. at *18. Brulotte’s rule is clean, easy to apply, and provides certainty to parties in licensing. Kimble’s suggested rule of reason would be difficult to apply, be subjective, provide no certainty, and significantly increase the amount and cost of litigation.
Kimble raised two additional arguments in an attempt to convince the Court that there was special justification to overrule Brulotte. First, he argued that Brulotte was based on the incorrect view that post-term patent royalties are anticompetitive. Second, he argued that Brulotte inhibits innovation.
The Court dispensed with both arguments quickly. The Court found that Brulotte was not based on a concern about the anticompetitive effects of post-term patent royalties. The Brulotte Court did not focus on anticompetitive aspects because the goal of the patent law is not to foster competition. As to Kimble’s innovation argument, the Court found that Kimble had not produced any evidence that post-term patent royalties stifled innovation. Brulotte does not preclude inventors from commercializing their inventions; there are several alternatives to post-term royalties that are sufficient incentives to innovate.
The Court’s message was loud and clear: if the law needs to be changed, Congress can do it.
The take-away message? Be careful in drafting patent licenses so that royalties are not being paid after the patent’s expiration unless those payments are specifically tied to something other than the patented invention. The old rule still applies.