Supreme Court Maintains Rule Prohibiting Post-Expiration Royalties
The Supreme Court maintained the status quo – patent royalties that extend beyond the expiration date of the underlying patent remain prohibited.
In Kimble v. Marvel Entertainment, LLC, the U.S. Supreme Court rejected a flexible test proposed by Kimble, a patentee and licensor, and maintained the clearly defined rule it adopted in a patent royalty case more than 50 years ago, Brullotte, that prohibits post-expiration royalties. The Kimble decision further eliminates uncertainties surrounding patent purchase and licensing activities by expressly recognizing that certain alternatives still remain which allow parties to contract around the established rule prohibiting post-expiration royalties. Further, the court specifically limited Brullotte’s application to patent royalties.
Kimble obtained a patent in 1990 on a toy that allows Spiderman fans to role-play as “a spider person” by shooting webs (pressurized foam string) from the palm of the hand. In 1997, Kimble sued Marvel alleging patent infringement in Marvel’s sale of “Web Blaster.” Two parties ended up negotiating a settlement in which Marvel agreed to purchase the patent from Kimble in exchange for a lump sum and a three percent royalty on Marvel’s future sales of the Web Blaster and similar products. No specific end date was included in the agreement.
During negotiation, the parties were unaware of the Brullotte rule and set no end date for royalties in the agreement. As the patent neared its expiration, however, Marvel sought a declaratory judgment confirming that it could stop paying the royalties. The district court grant relief in favor of Marvel, and the Ninth Circuit affirmed. Kimble subsequently appealed and asked the Supreme Court to overrule the Brullotte rule.
In its review, the Supreme Court confirmed that a post-expiration royalty is invalid. If appropriate, patent holders should be aware of the rule and establish contracts around it, preferably using one or more of the alternatives the Supreme Court expressly recognized in Kimble. Some of these alternatives include amortizing payments over a period beyond the expiration of the underlying patent, incorporating multiple patents in the license agreement, and/or incorporating a license to trade secrets or know-how.
Finally, the Supreme Court expressly limited the application of Brullotte to patent royalties, and explained that any other business arrangement, including all kinds of joint ventures, are not governed by the Brullotte rule.
Organizations dealing with patent license, whether looking to license their technology out, or license the technology of others, should contact Larkin’s IP attorneys, and discuss the implications of the Kimble case.