First published in LES Insights
The Supreme Court recently declined to overturn its 1964 decision in Brulotte v. Thys Co., where it held that a patentee could not receive royalties for sales made after the patent at issue expired. Adhering to its precedent, the Court noted that while the Brulotte rule prevents some parties from entering into contracts they desire, it still leaves open ways for them to allocate risk and reward in commercializing inventions.
In the 1964 decision Brulotte v. Thys Co., the United States Supreme Court held that a patent owner cannot receive royalty payments that "accrue" after a patent expires. Under this ruling, the patent owner cannot receive royalties for a licensee's sales or other activities covered by the patent that occur after the patent expires. The Court viewed such royalties as improperly extending "the patent monopoly beyond the [patent] period." Recently, in Kimble v. Marvel Entertainment, LLC,1 the Supreme Court declined to overturn this bright-line rule, instead emphasizing that the policy issues raised should be left to Congress. In addition, the Court noted that while the Brulotte rule prevents some parties from entering into contracts having some particular terms they may desire, it still leaves open ways for them to enter into other contracts with other terms that allocate risk and reward in commercializing inventions.
In 1990, Stephen Kimble received a patent on a toy that releases pressurized foam string from the palm of a hand. Kimble approached Marvel's corporate predecessor, seeking to license or sell his patent. Soon afterward, but without remunerating Kimble, Marvel's predecessor began marketing a toy—the "Web Blaster"—similar to Kimble's patented toy.
Kimble sued Marvel in 1997, alleging patent infringement. The parties ultimately entered into a settlement agreement. Specifically, Marvel agreed to purchase Kimble's patent in exchange for a lump sum (of about a half-million dollars) and a 3-percent royalty on Marvel's future sales of the Web Blaster and similar products. The agreement did not set an end date for royalties.
When negotiating the settlement, neither party was aware of the Supreme Court's decision in Brulotte holding that a patent owner cannot receive royalties for sales made after the patent's expiration. Later, however, after discoveringBrulotte, Marvel sought a declaratory judgment in federal district court to confirm that it could stop paying royalties once Kimble's patent expired. The district court, following Brulotte, entered judgment in favor of Marvel, declaring the royalty provision unenforceable after the patent's expiration. A federal appeals court affirmed.
Kimble petitioned the Supreme Court, asking it to overrule Brulotte. Adhering to its precedent, a 63 majority of the Supreme Court declined to do so.
The Kimble Decision
The Supreme Court first explained that it has "carefully guarded" the patent-expiration, Cutoff date, at which time the right to make or use the article, "free from all restriction," passes to the public. Brulotte, the Court noted, expressed this principle. There, the Supreme Court held that a license covering the use of a patented machine was unenforceable to the extent it provided for the payment of royalties accruing after the last of the relevant patents expired. The Brulotte Court explained that contracts to pay royalties post patent expiration conflict with ensuring public access to discoveries, because such contracts continue "the patent monopoly beyond the [patent] period."
Kimble argued that Brulotte should be overturned in favor of a flexible, case-by-case analysis of post-expiration royalty clauses. According to Kimble, Brulotte suppresses technological innovation and was premised on the mistaken assumption that post-expiration royalty arrangements are anti-competitive. But the Court did not find either argument as a strong justification to overturn Brulotte. Specifically, although admitting that not all post-expiration royalties are anti-competitive, the Court explained that Brulotte was based not on notions of harm to competition, but rather on the Court's interpretation of the patent laws, namely, that upon patent expiration, the formerly protected invention must be available to all for free. The Court also noted that Kimble did not offer any empirical evidence connecting Brulotte to decreased innovation. According to the Court, Congress is the proper forum in which to express Kimble's concerns, "[I]f Kimble thinks patent law's insistence on unrestricted access to formerly patented inventions leaves too little room for procompetitive post-expiration royalties, then Congress, not this Court, is his proper audience."
Although refusing to overrule Brulotte, the Court did acknowledge that the bright-line rule would prevent some parties from entering into desirable contracts. For example, as the Court noted, royalty plans extending beyond the life of a patent presumably would be coupled with a lower royalty rate, bringing the price within the affordable range of a cash-strapped licensee. As further observed, an extended royalty term beyond patent expiration could better allocate risks and rewards associated with commercializing inventions, particularly where years of development are required before bringing a patented product to market. The Court, however, identified a number of ways parties could potentially negotiate agreements without running afoul of the bright-line rule. For example, Brulotte, the Court explained, allows a licensee to defer payments for pre-expiration use of a patent into the post-expiration period. Further, under Brulotte, royalties may run until the latest-running patent covered by the parties' agreement expires.
Moreover, post-expiration royalties are allowable so long as they are tied to a non-patent right, such as a trade secret, even if closely related to a patent. Finally, the Court noted, Brulotte only places a restriction on royalties, leaving open all kinds of business arrangements, such as joint ventures, that may enable parties to share the risks and rewards of commercializing an invention.
Strategy and Conclusion
This case reaffirms the longstanding principle in Brulotte that patent owners cannot obtain royalties that accrue beyond expiration of the latest-running patent covered by the license or settlement agreement. The decision, however, illustrates certain ways parties may enter into agreements to allocate risk and reward where payments are made after a patent expires that avoid violating the Brulotte rule, for example, by tying post-expiration payments to a non-patent right, deferring payments for pre-expiration use of a patent into the post-expiration period, or having royalties that run until the latest-running patent covered by the parties' agreement expires.