Spidey sense needed on long-term licensing deals in light of recent Supreme Court decision in Kimble v. Marvel Entertainment.
This summer, the U.S. Supreme Court issued a ruling in Kimble et al. v. Marvel Entertainment that leaves intact a 50-year-old rule barring royalty agreements that continue after a patent expires. This ruling should give business owners serious pause. If you are in the business of licensing patents, you need to make sure you and your company are not licensing them beyond the expiration period. Practically speaking, anyone interested in executing long-term licensing deals – those that extend beyond a patent’s expiration date – may now have to find alternative, creative ways to structure such deals in hopes of getting around this rule. For example, the court in Kimble pointed out that royalties may continue after a patent expires so long as the royalty is tied to a nonpatent element, such as trade secrets. Given that trade secrets and, arguably, trademarks essentially do not expire, agreements that include those types of intellectual property with a “step down” in the royalty rate after the patent expires have long been a popular way to deal with the 1964 precedent-setting case. Nonroyalty joint ventures and other types of agreements could also be used to address extending a patent license beyond the life of the patent. While such agreements would need to be detailed and explicit, they nevertheless provide an alternative to the business or individuals involved.
What happened in Kimble
Kimble et al. v. Marvel Entertainment LLC (No. 13-720, June 22, 2015) was initially brought by Stephen Kimble, the inventor of a 1991 patent that Marvel Enterprises used to create the toy gloves that shoot foam string, just like Spider-Man. Marvel agreed to buy Kimble’s patent for a specific sum, and then pay him a 3 percent royalty. Significantly, the parties did not put an ending date on this royalty arrangement. In 2010, Marvel stopped paying Kimble royalties. Kimble sued Marvel, claiming that it still owed him royalties on that licensed patent based on the licensing agreement, even though his patent had expired. Unfortunately, Kimble was unable to convince the U.S. Supreme Court he was correct. The court ruled there was no compelling reason to end the ban on royalties after a patent expires in a suit over a defunct Spider-Man toy patent. Read the June 22 Supreme Court opinion, authored by Justice Elena Kagan and replete with humorous Spider-Man references.
Why it matters
To fully appreciate the court’s ruling in Kimble and decision to uphold its previous rulings, it is important to understand the court’s reasoning and the premise on which it is based. The original rule was set forth in Brulotte v. Thys Co., 379 U.S. 29 (1964), where Justice Douglas stated for an eight-justice majority: “A patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” This seems pretty clear. It’s a so-called “bright-line rule” that makes sense and can be easily applied, which it has been for the past half-century. As the court explained in Brulotte, a patent holder is not supposed to be able to exact the same terms and conditions from a licensee for the period after the patents have expired, as the patent-holder was receiving during the monopoly period. However, the problem with this argument is that it seems to dispense with basic contract law. That is, parties may legitimately and fairly bargain for an exchange, without duress or coercion, and then subsequently enter into a binding and enforceable contract memorializing their terms. This is also the problem with subsequent cases, like Scheiber v. Dolby Labs., Inc., 293 F. 3d 1014 (7th Cir. 2002), cert denied, 71 ULSW 3471 (2003). In Scheiber, the inventor of “surround sound” held several patents on the technology in the U.S. and Canada. His U.S. patents were set to expire in 1993, and his last Canadian patent was set to expire in 1995. In 1983, Scheiber sued Dolby for infringement. The parties settled by entering into a licensing agreement. Scheiber would license his patents to Dolby at a certain lower price (meaning more money in sales for Dolby), and in exchange for that lower price, Dolby agreed to continue paying a license fee on the patents beyond the expiration period of the U.S. patents, until the expiration of the last Canadian patent in 1995. In 1993, however, when Scheiber’s last U.S. patent expired, Dolby stopped paying royalties to Scheiber and, of course, Scheiber sued. One would think that Scheiber had the winning argument: the parties entered into a valid, fair, bargained-for contract that settled their previous lawsuit; Dolby materially breached that agreement; and, therefore, the court should enforce the agreement against Dolby. Turns out, that was not the case. Scheiber lost his lawsuit against Dolby, and the court invalidated the licensing agreement based on the Brulotte rule: “A patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” While this may seem unreasonable – maybe even ridiculous given certain circumstances – the U.S. Supreme Court has once again upheld the Brulotte rule in the Kimble case, ruling that none of Kimble’s arguments presented a compelling reason justifying overturning 50 years of precedent. In sum, business owners may have to look to more creative ways to achieve a long-term licensing deal in light of Brulotte and Kimble.
