Comic book characters have seen more than their fair share of court action in recent years.[1]  This year, it’s Spider-Man who has caught the attention of the US courts. 

Spider-Man was created in 1962 by Stan Lee and Steve Ditko, and is owned by Marvel Comics.  As his legend would have it, Peter Parker was an ordinary teenager until bitten by a spider and imbued with various spider-like abilities, including being able to shoot webs from his wrists.

Spider-Man has since become one of the most popular and commercially successful superhero characters in the Marvel universe.  Spider-Man’s introductory appearance was in one of Marvel’s highest-selling issues at the time, Amazing Fantasy #15 (August 1962).  Just nine months later, Spider-Man featured in his own solo series, The Amazing Spider-Man, which went on to become Marvel's top-selling series.[2]

A toy glove

On 25 May 1990, US inventor Stephen Kimble filed US Patent No. 5,072,856 “A toy glove for shooting string foam”.  The invention was for the combination of a pressurised container of string foam, and a glove which allowed the wearer to shoot the foam by pressing a trigger in the palm of the glove.  More simply put, the user could role-play as Spider-Man by mimicking his web-shooting ability.

The figures for the patent, which was granted and published on 17 December 1991, show:

Click here to view the image.

In December 1990, the inventor (“Kimble”) met with toy manufacturer, Toy Biz, Inc., (now owned by Marvel) to discuss the toy glove.  The two of them reached a verbal agreement that Toy Biz would pay Kimble if it used his “ideas” relating to the toy glove.

Instead, Toy Biz and Marvel went on to produce the “Web Blaster” toy glove, without compensating Kimble.  The Web Blaster looked something like this:

Click here to view the image.

In 1997, Kimble sued Marvel for patent infringement and breach of the verbal agreement.

The District Court granted summary judgment in Marvel’s favour for non-infringement of the patent, due to material differences between Kimble’s patent and the Web Blaster.  However, a jury separately found in Kimble’s favour for breach of the verbal agreement, and awarded Kimble 3.5% of past, present and future net sales of the Web Blaster.  Kimble appealed the Court’s decision on the patent infringement claim, while Marvel appealed the verdict on the contract claim.

In 2001, while the appeals were pending, Kimble and Marvel agreed to settle the disputes.  Under their new, written agreement, Kimble sold the US patent to Marvel and released Marvel from any obligations of the original 1990 verbal agreement.

Marvel in return paid Kimble US$516,214.62 for the assignment of the patent, together with a running royalty of 3% of net product sales of the Web Blaster product.

The agreement contained no express end date for the royalty payments, and did not specifically address what would happen upon expiry of the US patent (which had a maximum life of 20 years from its filing date). 

Kimble was paid more than US$6 million in royalties during the term of the patent.

The current dispute

In 2006, Marvel licensed production of the Web Blaster (and other toys) to the major toy manufacturer Hasbro.  New ‘Hasbro’ iterations of the Web Blaster would include new features, and would be packaged along with other Marvel products, such as Spider-Man masks.  This development of the toy range resulted in some disagreement between Marvel and Kimble as to how the 3% royalties should continue to be calculated.

In 2008, Kimble filed proceedings for breach of contract.  Marvel counterclaimed, seeking a declaration that it would no longer be required to pay Kimble any royalties at all, upon expiration of the patent (which would expire on 25 May 2010).

The magistrate judge found that Kimble could not recover royalties beyond the expiration of the patent.[3]  The parties’ settlement agreement related to the transfer of patent rights only; it did not relate to the transfer of any other rights.  Accordingly, royalties relating to the patent had to end upon expiration of the patent – as per the longstanding Brulotte precedent.[4]  The District Court agreed and adopted that recommendation.

Kimble appealed to the Ninth Circuit US Court of Appeals, which, after some consideration of the appropriate precedents, affirmed the District Court’s judgment.  The Court felt that it was bound byBrulotte, although it acknowledged that the precedent has attracted criticism which might be warranted in cases such as the present.

Kimble has again appealed, this time to the Supreme Court.  In doing so, he has specifically requested that the Brulotte precedent be overturned.[5]  In particular, the issue is whether Brulotte should still represent a bright-line rule that royalties payable under a patent licensing agreement are no longer payable upon expiration of the relevant patent.

Kimble calls the precedent outdated and inflexible.  Marvel disagrees, saying that Brulotte simply ensures that a patentee only receives compensation for the rights granted by the patent and within the patent’s scope and term.  Anything more would allow for a patentee to abuse its bargaining power.

Early indications from the judges suggest that the Brulotte precedent may stand until the position is revisited by Congress, and that Marvel will not be obliged to continue with the 3% royalty payments beyond the life of the patent.  A decision is expected by June 2015.

The position in New Zealand

Considering how a similar case might play out in New Zealand, there are a number of issues to think about if you are preparing or negotiating an intellectual property licence agreement.  These include:

  • Term: what is the length of your agreement?  Is it fixed, does it equal the life of the intellectual property, is it renewable, or does it claim to be perpetual?  Very explicit wording should be used. 

If an agreement does not provide for a term, the Court is likely to imply a term permitting termination on reasonable notice.  Parties should also consider allowing for early termination – for example, in the event of a breach of the agreement, insolvency or change in control, or upon expiration or revocation of the relevant intellectual property rights.

Note that for patents, under section 168 of the Patents Act 2013, any contract relating to a patent can be terminated by either party, on giving three months’ written notice, at any time after the patent’s expiration.

If you are the licensor, think about licensing a broad range of intellectual property rights (so include, for example, copyright and trade secrets), to avoid reliance on a particular intellectual property right (for example, a registered right such as a patent or trade mark). 

  • Royalties: what is the amount being paid, when is that amount due, and how is the amount calculated?  Does the agreement contain reporting and auditing terms in order to track what you are owed?  If the agreement relates to various intellectual property rights (such as patents, copyrights, and trade marks), have royalties been apportioned for each of those rights?
  • Territory: intellectual property rights are territorial.  The parties should carefully consider in which countries the intellectual property is protected, and in which countries the agreement operates.
  • Improvements: products and processes often evolve over time.  Have the parties considered what might happen where one or the other makes improvements to the intellectual property, and how that might affect the operation of the agreement?