In a decision issued June 22, 2015 — Kimble v. Marvel Entertainment, LLC — the United States Supreme Court reaffirmed and declined to overrule long-standing precedent holding that a patent holder cannot charge royalties for the use of an invention after its patent term has expired.

The invention: a Spider-Man type web-blaster!

Not all patent cases feature inventions that are easy to understand.  Take, for example, patent cases in the mid/late 2000s featuring orthogonal frequency-division multiplexing (a method of encoding digital data on multiple carrier frequencies).

This case, in contrast, features an invention to which almost all of us can relate.  In 1990, inventor Stephen Kimble obtained a patent on a toy that allowed children to role-play as a “spider person” by shooting “webs” (pressurized foam string) from the palm of their hand.  Kimble met with Marvel Entertainment, the manufacturer of various Spider-Man products, seeking to sell or license his patent.

Marvel apparently liked Kimble’s invention.  Sometime after their meeting, Marvel began marketing a “Web Blaster” — a toy mimicking Kimble’s invention, using a polyester glove and a canister of foam.  But Marvel did not sign any agreement with Kimble, and made no payments to him.

The patent infringement case and settlement

Kimble sued Marvel for patent infringement in 1997.  That case settled, and the settlement agreement provided that Marvel would purchase Kimble’s patent in exchange for a lump sum of approximately $500,000 and a 3% royalty on Marvel’s future sales of the Web Blaster and similar products.  The settlement agreement set no end date for the royalty payments.

In negotiating the settlement, neither party appeared to be aware of a 1967 decision by the United States Supreme Court —Brulotte v. Thys Co. — holding that a patent holder cannot receive royalties for sales made after the patent’s expiration.

The sequel lawsuit

When Marvel finally “stumbled across” (the Court’s words) theBrulotte decision, it filed a new lawsuit for declaratory relief confirming that Marvel could cease paying royalties under the settlement in 2010 — 20 years after the patent issued, which is the duration for most patents.

The District Court sided with Marvel, and the Ninth Circuit affirmed.  The Supreme Court granted certiorari “to decide whether, as some courts and commentators have suggested, we should overrule Brulotte.”

The Supreme Court’s holding

In a 6-3 decision, the Supreme Court affirmed, holding thatBrulotte remains good law unless and until Congress  determines otherwise.

The Court observed that in crafting patent laws, Congress struck a balance between fostering innovation and ensuring public access to discoveries.  Patents, the Court held, “endow their holders with certain superpowers, but only for a limited time.”  During the patent’s lifespan, the holder has exclusive rights to the invention, and may sell or license those rights.  But upon expiration, the rights to the invention pass to the public.

The Court rejected Kimble’s invitation to overrule Brulotte and replace it with a “flexible, case-by-case analysis” of post-expiration royalty clauses, noting: “Overruling precedent is never a small matter.”  Brulotte’s “statutory and doctrinal underpinnings,” the Court held, “have not eroded over time.”  Kimble also argued that Brulotte suppressed technological innovation and was based on a mistaken view of the competitive effects of post-expiration royalties.  But the Court essentially told Kimble, and others critical of the Brulotte decision, to direct their concerns to Congress.

Perhaps most noteworthy was the Court’s explanation that parties “can often find ways around Brulotte” in permissible ways, given some creativity in transaction structuring.  For example:

  • a licensee can defer payments for pre-expiration use of a patent into the post-expiration period
  • licensing agreements covering multiple patents can provide for royalties “until the latest-running patent covered in the parties’ agreement expires”
  • licensing agreements covering both patents and closely related non-patent rights (like trade secrets) can provide for continuing royalties after patent expiration as long as the royalties are tied to the non-patent right
  • parties may structure their relationship as a joint venture in which the parties share risks and rewards of commercializing inventions but without a royalty component

Takeaway

After a patent expires, patent holders can’t continue charging royalties for use of the invention.  To secure post-expiration revenue streams, patent holders must look to other transaction structures.