On Monday, the Supreme Court decided the closely-watched case of Kimble v. Marvel Enters., where the patent owner Mr. Kimble sought to change the fifty-year-old, often-criticized rule of patent licensing from Brulotte v. Thys. Co., 379 U.S. 29 (1964).
Mr. Kimble was unsuccessful—the high court decided by a 6-3 vote that the rule from Brulotte lives on, and charging post-expiration patent royalties is still “unlawful per se.”
Mr. Kimble’s case against Marvel
The case stems from a prior settlement agreement between Mr. Kimble, the inventor of the Spider-Man “Web Blaster” toy, and Marvel Entertainment, LLC, the seller of that toy. In the settlement agreement, Mr. Kimble exchanged his patent for a lump-sum payment and a perpetual running royalty.
But Mr. Kimble’s perpetual running royalty violated the rule from Brulotte, which prohibits post-expiration patent royalties. And the Supreme Court’s decision confirms that this violation now prevents Mr. Kimble from collecting any royalties after the patent’s expiration.
The Supreme Court’s analysis of Brulotte
The Court’s opinion outlines three main justifications for following stare decisis—the principle that “today’s Court should stand by yesterday’s decisions”—in this case:
Brulotte is a matter of statutory interpretation. “Stare decisis carries enhanced force when a decision, like Brulotte, interprets a statute … Congress can correct any mistake it sees.”
Brulotte has received enduringCongressional acquiescence. “Congress has spurned multiple opportunities to reverse Brulotte … Brulotte has governed licensing agreements for more than half a century.”
It’s especially likely that parties have relied on the rule from Brulotte. “In … ‘cases involving property and contract rights’ … considerations favoring stare decisis are ‘at their acme.’ … That is because parties are especially likely to rely on such precedents when ordering their affairs.”
The Court then noted that the reasons typically invoked when the Court reverses its prior precedent don’t apply here. In particular, the Court stated that “Brulotte’s statutory and doctrinal underpinnings have not eroded over time,” and that “nothing about Brulotte has proved unworkable.”
Practical tips—how to deal with the rule
So what does this mean for patent owners? The short answer is, there’s no need to update your patent licensing templates. Assuming you accounted for Brulotte in structuring your prior agreements, you don’t need to do anything new.
Going forward, patent owners should continue to account for Brulotte as they have in the past. As the Court itself noted, the rule from Brulotte “is simplicity itself to apply. A court need only ask whether a licensing agreement provides royalties for post-expiration use of a patent. If not, no problem; if so, no dice.”
The Court, in dicta, listed several approved arrangements that patent attorneys have used for decades to contract “around” the rule from Brulotte. In particular, the Court appeared to bless following alternative remuneration arrangements for patent owners:
Deferred payment. For example, 20 years of royalties can be amortized over 40 years of payments. “Brulotte allows a licensee to defer payments for pre-expiration use of a patent into the post-expiration period; all the decision bars are royalties for using an invention after it has moved into the public domain.”
Licensing multiple patents. “Under Brulotte, royalties may run until the latest-running patent covered in the parties’ agreement expires.”
Hybrid licensing. Royalties for non-patent rights—even non-patent rights that are “closely related to a patent”—can extend beyond the patent’s expiration. “For example, a license involving both a patent and a trade secret can set a 5% royalty during the patent period (as compensation for the two combined) and a 4% royalty afterward (as payment for the trade secret alone).”
Non-royalty business arrangements. For example, joint ventures “enable parties to share the risks and rewards of commercializing an invention.”
Thus, the rule from Brulotte can be dealt with relatively easily in most cases. But there are still some nuances to be aware of.
For instance, a hybrid agreement should differentiate between patent rights and non-patent rights, through either “a discount or other clear indication that the license was in no way subject to patent leverage.” This is typically accomplished through a “step down” royalty provision (of the type noted in the Court’s opinion). Under this type of provision, the royalty continues beyond expiration or invalidation of the patent, but at a lower rate.
And notably, Brulotte doesn’t apply when there’s not an issued U.S. patent in play. A perpetual royalty obligation is generally permissible in a license agreement for know-how or trade secrets.
The bottom line is, when you see a running royalty in a licensing agreement or term sheet, make sure it complies with Brulotte in one of the ways outlined above. It’s a relatively simple rule that now has uber-precedent, but as Mr. Kimble learned, you can’t ignore it.
Kimble v. Marvel Enters., 576 U.S. ___ (2015), Slip Op. at 4.
See, e.g., Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979) (license agreement for patent application was enforceable where the royalty rate stepped down and continued indefinitely after no patent was issued); Warner Lambert Pharm. Co. v. John J. Reynolds, Inc., 178 F.Supp. 655, 665-66 (S.D. N.Y. 1959), aff’d 280 F.2d 197 (2nd Cir. 1960) (license agreement for trade secret was enforceable where the royalty continued indefinitely even after the loss of trade secret status).