On March 31, 2015 the United States Supreme Court heard arguments in Kimble v. Marvel Enterprises, Inc. (“Kimble”).

At issue in Kimble is whether to overrule Brulotte v. Thys Co. (“Brulotte”).

In Brulotte, Thys Co., sold a hop-picking machine to farmers for a flat fee and a license for use.  The license required a use-based royalty, with a $500 minimum each season. The pertinent patents expired, yet the licenses continued beyond expiry.  Douglas, J., wrote for the majority that “a patentee’s use of a royalty agreement that projects beyond the expiration date of the patent is unlawful per se.”

The majority distinguished between royalties that accrued after patent expiration, and royalties paid after patent expiration. The license in Brulotte did not make that distinction.

Kimble concerns a settlement agreement arising from a patent infringement lawsuit. Kimble obtained a patent for a glove for shooting foam string from the palm as did Marvel’s character Spider-Man.  Kimble had discussed his then-pending patent application with the president of Marvel’s corporate predecessor.  Marvel soon thereafter began producing and selling a similar product known as a Web Blaster.

Kimble sued for patent infringement and breach of contract, and was partially successful at trial.  Settlement was reached while appeals were pending.  Marvel agreed to buy Kimble’s patent for a lump-sum payment and 3% royalty on Web Blaster sales. The settlement agreement and the royalty clause had “no expiration date.”

A dispute arose, and Kimble sued for breach of contract. Both the district court and the Court of Appeal held that under Brulotte the royalty provision was unenforceable after the patent expiration. The Supreme Court then granted certiorari, against the advice of the United States Solicitor General, who filed a brief supporting Brulotte.

Kimble suggests that the per se rule of Brulotte be replaced by a flexible rule of reason. Kimble’s argument focuses on economic, patent policy, and anti-trust rationales said to underlie Brulotte. Kimble argues that these rationales actually support overturning Brulotte.

Marvel, defends Brulotte on the basis of stare decisis and patent policy, emphasizing that Brulotte is narrow, and is based on patent misuse, not on anti-trust.  Marvel argues that stare decisis applies with particular force because patent misuse involves statutory principles of the Patent Act, and notes that Congress could chose not to overrule Brulotte in the Patent Act amendments of 1988.

A number of amicus curiae, including the United States, filed briefs. Eight favour overruling Brulotte.  Two would clarify Brulotte.  Six would uphold Brulotte.

Kimble and Brulotte both reflect long-standing tension between patent law and competition law.  Early patents of invention were sometimes in defiance of previous royal grants to the guilds1. Patent rights themselves exist only as a statutory exception under the Statute of Monopolies.  Determining where the helpful, or beneficial grant of patent rights that spurs economic activity ends, and where an improper extension of monopoly rights that strangles economic activity begins, is difficult enough, even before considering limits on freedom of contract, and to the desirability of encouraging settlement of law suits.

The “Rule of Reason” approach is said to be supported by economic theory as more economically efficient.  However, as seen in anti-trust law since 1988, in practice the “Rule of Reason” approach imposes a great evidentiary burden on the challenger – a burden that may be impossible to discharge, even where there is market power and anti-competitive behaviour that extracts unmerited economic rents.  The real issue in Kimble is whether the default rule should place transaction costs on the monopolist or on the challenger.  It may be that the clarity and simplicity of the Brulotte allocation of transaction costs may be more economically efficient overall than the “Rule of Reason”.

The questioning at the hearing was lively.  It challenged the economic foundation of Kimble’s argument, and whether the whole matter ought to be left to Congress.

Whatever the outcome, it may have a significant impact on the future of patent licensing agreements in the United States.