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Patent Law Alert - [Super] Powers Bestowed by a Patent Have an Expiration Date, a discussion of the 2015 U.S. Supreme Court decision Kimble v. Marvel Entertainment

11.2015

In exchange for the public disclosure of inventions, patentees are granted a monopoly on their inventions for a limited period of time. U.S. patent law seeks to balance the use of patents to encourage innovation and public disclosure, while limiting the amount of time patentees may enforce their rights to prevent others from exploiting their inventions.

In 1964, the U.S. Supreme Court, in Brulotte v. Thys Co., held that a patentee cannot receive royalties for sales made after its patent expires. The Brulotte Court found that contract provisions providing for royalties beyond the expiration of a patent’s term were unenforceable and “unlawful per se” as being contrary to U.S. patent law’s policy of dedicating inventions to the public domain.

A half a century later, the Supreme Court upheld Brulotte in Kimble v. Marvel Entertainment, No. 13-720 (June 22, 2015), in an opinion full of superhero puns. But the Court also provided a few hints on how the constraint can be circumvented.

FACTS OF KIMBLE

Inspired by Spider-Man, the young crime fighting fictional superhero with spider-like powers, Stephen Kimble invented and patented a toy that shoots a spray foam “spider web.” The toy included a polyester glove to be worn on the user’s hand and attached to a canister of spray foam. The glove included a mechanism that allowed the user to release the spray foam from the canister, mimicking Spider-Man’s web-slinging super power.

In 1997, Kimble sued Marvel Entertainment, maker and marketer of Spider-Man products, for patent infringement. Rather than engaging in an epic battle of good versus evil, the parties settled. Marvel agreed to purchase Kimble’s patent for approximately $500,000 and pay a 3% royalty on all future sales of the toy. The settlement agreement set out no termination date for the royalty payments.

Over a decade later, and after Kimble’s patent had expired, Marvel brought a declaratory judgment action in Federal District Court against Kimble, seeking an order that Marvel could stop paying royalties in light of the patent’s expiration. Citing Brulotte, the District Court held, and the 9th Circuit Court of Appeals affirmed, that the royalty provisions in the settlement agreement that extended beyond Kimble’s patent term were unenforceable. The U.S. Supreme Court granted certiorari to review the lower courts’ decisions.

SUPREME COURT DECISION

Kimble and various amici argued to the Supreme Court that Brulotteshould be overruled for several reasons including that the Brulotte rule lacked statutory support and was based on flawed economic grounds.  In particular, they argued that Brulotte was decided 50 years ago as an attempt to carry out the intent of the statutory text, but without explicit statutory support. In other words, the U.S. Supreme Court in Brulotteengaged in policymaking extending beyond its proper judicial role.

It was further argued that the economic theory underlying the Brulottereasoning has largely been refuted and thus was flawed from the onset. In Brulotte, the Supreme Court found that post-expiration royalties were an improper leveraging of the patentee’s monopoly power to extend that right beyond the term of its patent. But, as the dissent in Kimble stated, extending licensing fees over a longer period of time results in a more efficient use of the patent. Early-on in product development, the parties may not be certain of the product’s marketability. By compressing the royalty term into the patent term, theBrulotte rule imposes higher initial costs, hindering use of the patent.

The Supreme Court in Kimble upheld Brulotte, relying mainly on the doctrine of stare decisis, which posits that today’s court should stand by yesterday’s ruling, … that adhering to long-standing court decisions brings stability and certainty to the law. The Kimble Court stated that although the Brulotte decision rested on policies and purposes underlying patent law, and not on any specific statutory provision, principles of stare decisis have overriding effect. The Kimble Court explained that, since Brulotte was decided over 50 years ago, interested parties have had ample time to petition Congress and Congress has had many opportunities to overturn Brulotte, but has refrained from doing so.

The Supreme Court further explained that property and contract considerations weighed against overruling Brulotte. Parties have long relied on Brulotte’s interpretation of the patent laws when negotiating the terms of their contracts. Overruling Brulotte now, the Court explained, would disrupt such reliance. The Court seemingly wished to avoid having contracts drafted in reliance on Brulotte from becoming entangled in a web of uncertainty.

The Supreme Court explained Brulotte’s holding was not difficult to apply when entering into contracts. The Court also suggested several ways royalty payments might be structured that would allow a licensee to defer payment of royalties earned prior to expiration into the post-expiration period, and still not run afoul of its holding. For instance, a licensee could agree to pay a specified percentage of royalties for the patent’s 20-year term, but amortized over a longer period, for example, 40 years. Royalties could also be tied both to patent and to non-patent rights, such as trade secrets, with a portion of the royalties tied to the non-patent rights extending beyond the patent’s expiration. Other business arrangements that do not rely on royalty payments may also extend beyond patent expiration.

CONCLUSION

Relying on stare decisis, lack of Congressional action, and relatively simple contract-drafting alternatives, the U.S. Supreme Court refused to disturb the law set down by Brulotte a half century ago.  It thus remains the law that a patentee may not extend its monopoly right by continuing to receive royalties for sales made after its patent expires.

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