Caught in a Web – Royalties and Patent Expiration

9.29.15

In late June, the U.S. Supreme Court issued the much-anticipated ruling regarding the availability of royalties beyond a patent’s expiration date. Its decision in Kimble v. Marvel Enterprises, Inc. may leave many patent holders grumbling. But the Court’s likely response would be along the lines of that old axiom, “With great power, there must also come great responsibility.”

Making toys

Stephen Kimble invented a Spider-Man toy that allowed users to mimic Spider-Man’s web-shooting abilities with foam string. He obtained a patent on the toy that expired on or about May 25, 2010. In December 1990, Kimble met with Marvel about the toy. Marvel passed on it but subsequently released a similar toy called the Web Blaster.

In 1997, Kimble sued Marvel for patent infringement and breach of a verbal contract under which Marvel allegedly agreed to compensate Kimble if it used any of his ideas. The patent claim was dismissed before trial, but a jury ruled in Kimble’s favor on the contract claim and awarded him 3.5% of past, present and future net product sales of the Web Blaster. Kimble appealed the dismissal of the patent claim, and Marvel appealed the contract verdict.

The parties settled the case in 2001. Under the settlement terms, Marvel paid about $500,000 to buy the patent and also agreed to pay a 3% royalty on “net product sales,” defined as “product sales that would infringe the patent but for the purchase and sale thereof … as well as sales of the Web Blaster product that was the subject of the action and to which the judgment refers.” The agreement had no expiration date.

After several disagreements, Kimble eventually filed a breach of contract lawsuit concerning the calculation of royalty payments. Marvel counterclaimed, seeking a declaration that it wasn’t required to pay Kimble royalties after the patent expired in 2010. The trial court sided with Marvel, and Kimble appealed.

Affirming reluctantly

Citing the earlier Supreme Court case Brulotte v. Thys Co., the U.S. Court of Appeals for the Ninth Circuit “reluctantly” affirmed the district court’s decision. In Brulotte, the High Court ruled that “a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se” because it extended the patent monopoly beyond the patent period. And, in doing so, the Supreme Court said, the agreement would conflict with patent law’s policy of establishing a post–patent expiration public domain.

The appellate court acknowledged that Kimble might have been able to obtain a higher royalty rate if the parties had understood that royalties would cease on patent expiration. Neither party was aware of Brulotte when the royalty agreement was made. Nonetheless, the court was bound by the Brulotte rule and, therefore, held that the licensing agreement was unenforceble. The case then moved to the Supreme Court.

Superseding the decision

Kimble asked the High Court to override the Brulotte rule and adopt a case-by-case approach based on the so-called “rule of reason.” But the Court, in a 6-3 decision, declined to do so.

Justice Kagan’s majority opinion began by noting that the Supreme Court has carefully guarded the 20-year patent expiration date established under the federal Patent Act. It has long opted not to enforce laws and contracts that restrict free public access to formerly patented inventions. As Kagan put it in her pun-filled opinion: “Patents endow their holders with certain superpowers, but only for a limited time.”

The Court’s ruling relied largely on the doctrine of “stare decisis.” According to the doctrine, overruling a case always requires special justification — over and above the belief that the earlier case was wrongly decided. Moreover, in cases such as this, where the earlier case interprets a statute, the doctrine carries enhanced force because critics can take their objections to Congress if change is desired. “As against this superpowered form of stare decisis,” Kagan wrote, “[the Court] would need a superspecial justification to warrant reversing Brulotte.”

But traditional justifications for abandoning stare decisis didn’t apply here, the Court found. For example, nothing about the Brulotte rule has proved unworkable. To the contrary, according to the Supreme Court, the decision is simple to apply — particularly compared to Kimble’s proposed approach, which would likely produce high litigation costs and unpredictable results.

Recognizing alternatives

The Supreme Court’s ruling in this case wasn’t what patent holders had hoped for, but all is not lost. In fact, the Court’s opinion enumerates several alternative approaches that can be taken to accomplish Kimble’s desired effect.