In a much-anticipated decision, the U.S. Supreme Court has retained the long-standing rule that patent holders cannot charge royalties for use of a patent after its term has expired.
In Kimble v. Marvel Enterprises, Inc., the Court considered an appeal of a case in which the inventors of a toy with Spider-Man-like web-shooting capabilities sold a patent covering the toy to Marvel Enterprises. The agreement imposed a 3% royalty and had no expiration date. After the patent expired , the inventors filed suit for breach of contract. Marvel argued that it was not obligated to pay royalties for sales made after the patent’s expiration. Both the district court and the U.S. Court of Appeals for the Ninth Circuit agreed with Marvel, but the inventors appealed to the Supreme Court.
In the appeal, the inventors argued that the the 50-year-old rule of Brulotte v. Thys Co., which states the “a royalty agreement that projects beyond the expiration date of the patent is unlawful per se,” was “[a] product of a bygone era” and should be overruled.
The Court disagreed. While acknowledging that “[t]he Brulotte rule … prevents some parties from entering into deals they desire,” the Court favored retaining the status quo since overturning the prior decision would “upset expectations” and there was no “superspecial justification” warranting reversal.
In addition, the Court noted that there are many ways for parties to structure deals that provide longer royalty periods without violating Brulotte, including:
- payments for use of an invention during the patent’s term can be deferred into a post-expiration period;
- post-expiration royalties can be tied to a non-patent right (such as a license of trade secrets); and
- other business arrangements (such as joint ventures) can confer benefits long after a patent term has expired.
Patent licensors who want a longer royalty term should carefully draft license agreements to ensure that the royalties fall under these exceptions to the Brulotte rule and are not considered to be merely post-expiration patent royalties.
After a period in which the Court has seemed eager to change a number of fundamental principles of U.S. patent law, the Court’s citation of stare decisis in Kimble v. Marvel Enterprises, Inc. may strike some as surprising. At a minimum, it suggests that the Court isn’t ready to completely abandon predictability in U.S. patent law.
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