On June 22, 2015, the Supreme Court issued its decision in Kimble v. Marvel Enterprises Inc., No. 13-720, affirming the Ninth Circuit’s application of Brulotte v. Thys Co., 379 U.S. 29 (1964), which stands for the proposition that patent license agreements having continued royalty obligations post-patent expiration are per se unlawful. Writing for the 6-3 majority, Justice Kagan held that Brulotte must be adhered to because it rests on a “superpowered form” of stare decisis. Justice Alito dissented, joined by Chief Justice Roberts and Justice Thomas.

Background

Appellant Stephen Kimble invented a Spider-Man toy that allowed users to mimic Spider-Man’s web-shooting abilities with foam string. Kimble discussed his invention, patented under U.S. Patent No. 5,072,856, with the President of the predecessor company to Marvel, who verbally agreed to compensate him if Marvel used his ideas. Despite telling Kimble that it was not interested, Marvel began manufacturing a Spider-Man toy called the Web Blaster, prompting Kimble to sue for patent infringement and breach of contract. While the district court entered summary judgment of non-infringement, a jury returned a verdict in favor of Kimble on his breach of contract claim, which the parties then settled while the appeal was pending. As part of the settlement agreement, Marvel agreed to purchase Kimble’s patent and pay Kimble 3% of Marvel’s net product sales, which was defined to include both sales that would infringe the patent and sales of Marvel’s Web Blaster. The settlement agreement had no expiration and no provision discounting the royalty rate after the assigned patent expired in 2010.

Proceedings Below

While neither side was aware of Brulotte when negotiating the settlement, Marvel later learned of it and, upon making that discovery, sought a declaratory judgment that it was not required to pay royalties after the 2010 expiration of the assigned patent. The district court agreed with Marvel, and on July 16, 2013, the Ninth Circuit “reluctantly” affirmed.

In affirming, the Ninth Circuit reviewed Brulotte in which the Supreme Court held “that a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.” Kimble, 727 F.3d at 860 (quoting Brulotte, 379 U.S. at 32).Brulotte and its progeny, the Ninth Circuit stated, “creat[ed] two bright line rules[..]” Id. at 863. First, “no contract can properly demand royalty payments after the patent expires.”Id. Second, “a contract that provides for royalties either when a patent expires or when it fails to issue cannot be upheld unless it provides a discount from the alternative, patent-protected rate.” Id. Because the Kimble-Marvel settlement agreement provided one royalty rate for both patent and non-patent rights without a post-patent-expiration discount, Kimble could not collect royalties after the patent expired. Kimble’s petition to the Supreme Court was granted, notwithstanding the Solicitor General counseling against it.

Supreme Court Opinion

Holding that stare decisis means “sticking to some wrong decisions,” Justice Kagan held that Brulotte rests on a “superpowered form” of stare decisis because Congress, despite repeatedly amending the patent laws, including the specific provision that Brulotte rests on (35 U.S.C. § 154), has rebuffed bills that would replace Brulotte’s per se rule. Also, because the Brulotte rule involves property and contract rights on which contracting parties may have relied, overturning Brulotte would require “superspecial justification.” Justice Kagan further reasoned, despite Kimble’s argument that antitrust and patent misuse law have changed over time, that Brulotte’s statutory and doctrinal underpinnings in patent law continue to draw a sharp line cutting off patent rights after a set time period. As such, sticking to the easily applied bright line test instead of Kimble’s proposed “elaborate” rule of reason analysis that would produce high litigation costs and yield “unpredictable results,” strengthens the case for adhering to the long-settled precedent.

Further, in response to Kimble’s economic argument that post-expiration royalties could be pro-competitive, the Court held that while likely persuasive in an antitrust context, where Congress through the Sherman Act has provided the Court with free rein to revise legal analysis to keep up with the evolution of economics, the patent laws do not provide the Court with the same sort of law-shaping authority. Regarding Kimble’s contention thatBrulotte suppresses technological innovation, the Court found no evidence of such in the record, and admitted that it would not know how to evaluate whether Brulotte had caused any significant real-world economic harm, holding that such arguments are best directed to Congress.

In dissent, Justice Alito argued that stare decisis, while important to the rule of law, did not require retaining Brulotte’s per se rule as it did not actually interpret a statute and thus was not entitled to “super-duper protection.” Rather, he wrote that Brulotte should be reversed because its reasoning has been disproved, it erects economic barriers to innovation and unsettles contractual expectations. Indeed, Justice Alito reasoned that because monetizing an innovation could take years, allowing for post-expiration royalties encourages innovation; and therefore, prohibiting such arrangements, “erects an obstacle to efficient patent use.” Justice Alito also cautioned that, while Congress has not expressly overturnedBrulotte, interpreting congressional silence is “at best treacherous.” (Quoting Girouard v. United States, 328 U.S. 61, 69 (1946)). Thus finding Brulotte to be an “obvious mistake,” Justice Alito, joined by Chief Justice Roberts and Justice Thomas, would have reconsidered and overruled it.